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The Market in Financial Instruments Directive (MiFID) is generating a tremendous amount of excitement amongst IT vendors servicing the financial services sector. It is seen as a major opportunity for generating additional sales. A number of highly informative white papers are circulating that clearly identify how IT can help the financial services community address the compliance issues raised by MiFID. But is this all too much too soon? Will MiFID really happen and how does a Financial Services CIO make the right judgments in these circumstances?
MiFID is the proposed EU directive set to replace and expand the existing Investment Services Directive. It aims to ensure that market participants can interact with other parties across Europe on the same terms of business as in their home country. It directly impacts virtually all players in the investment and trading community including investment banks, exchanges, asset managers, hedge funds, alternative trading systems, electronic communications networks and independent financial advisers. The legislation will cover almost all financial tradable products except foreign exchange products and have a direct impact on how firms handle client agreements, client classification, conflicts of interest, execution-only services, outsourcing, best execution, pre and post trade transparency and record keeping.
It is the breadth of the directive’s scope impacting so many areas and so many potential customers that is generating such excitement amongst the IT community. Compliance will only be possible with significant deployment of IT. BUT there are serious hurdles still to be overcome before MiFID will become a reality.
The directive was originally meant to be fully implemented by April 2007 but has been put back to November 2007 only this month. MiFID implementation is relying on the Lamaflussy process meaning that individual country regulators will set their own rules for compliance (within the general EU framework) by this date. The likelihood of a genuinely level playing field across Europe seems remote as each regulator will place their own emphasis on MiFID regulation according to local conditions. Perhaps most worryingly, regulatory rules that will underpin MiFID are still being fully defined – they are not anticipated before April 2006 – with the cost/benefit analysis of the impact of the legislation that the FSA has a statutory obligation to produce only now being undertaken. (The EU failed to produce its own cost/benefit at the outset and at any point during subsequent negotiations, which is astonishing given the enormity of the impact of this directive.) Following preliminary discussions with firms the FSA has stated that it is far from clear if the benefits from MiFID will outweigh the costs, for the UK.
So will MiFID face further delays? With so many details still to be determined this is possible and it could still change in substance particularly if the cost/benefit analysis is not favourable. Indeed will it happen at all? Although there are several well informed skeptics out there who suggest that the ‘political will’ needed to make such a fundamental change is not there, MiFID is being taken seriously by the FSA who issued its own guidance notes in November. The MiFID Readiness Survey that polled London Market participants in August and September found that 44% of the respondents were planning to budget for MiFID technology projects in 2006 and 60% of respondents had assigned staff to work full time on compliance issues.
It seems the MiFID juggernaut has begun to roll under its own steam. CIOs are advised to proceed with caution – understand the issues, make plans, get the budget, but only ‘look and hope’ at the vendor community’s wares – for now.