Probably the most fundamental regulatory reform to hit the European financial market in at least a decade, the Markets in Financial Instruments Directive (MiFID) is due to come into force across the European Union on 1 November 2007. MiFID is a core element of the European Union's Financial Services Action Plan (FSAP) that aims to create a truly single EU market in securities and remove obstacles to cross-border investment business by harmonising EU legislation as closely as possible.
MiFID should have an impact on all firms operating in the investment services and corporate finance sector; retail banks and building societies in relation to investment business and financial advisers holding assets on behalf of clients or seeking to do business Europe. The UK, through the Financial Services Authority (FSA), was one of the few EU states to implement the necessary rule changes to meet MiFID by the 31 January 2007 deadline, although it seems that most EU states should have the necessary laws in place by November.
In broad terms, firms' organisational systems and procedures for conduct of business will be the main areas affected by MiFID. There are also new operational rules for players in the equity markets such as regulated stock exchanges, multilateral trading facilities (MTFs) and "systematic internalisers" (SIs) (primarily large investment banks who systematically trade shares from their own books). Even if authorised firms do not come directly within the Directive's scope, they will likely be affected by the resulting overhaul to the FSA Handbook brought about by MiFID and other FSAP measures.
Given the key focus on uniform information capture, data handling and reporting as a means to achieve market efficiency, MiFID will almost certainly have a significant impact on firms' IT systems, outsourcing and information management. For example:
- Organisational Requirements: Firms and markets will need to adhere to comprehensive rules covering internal systems, risk management and audit. Firms need to comply with extensive record keeping requirements in relation to business conducted and contractual arrangements for outsourcing (including existing agreements) will need to conform to prescribed FSA Handbook requirements. The FSA may also need to be notified of the terms of such arrangements if they relate to critical or important operations.
- Transparency Requirements: To ensure transparency in the securities market, MiFID sets out comprehensive trade-data publication requirements. In general, certain prescribed trading information - pre-trade data (for sell side trading platforms and Sis) and post-trade data (in relation to trades by all investment firms, whether conducted over the counter or through a regulated market) - must be made available as close to real time as possible (and not later than three minutes) through a chosen reporting venue. Firms are also obliged to ensure that such post trade transaction data is accurate and made available to market participants on reasonable commercial terms.
- Conduct of Business Rules: UK firms will be required to "re-paper" all their clients into new MiFID-defined categories ("retail", "professional" or "eligible counterparties"). The category of client determines the requirements on a firm in relation to information they have to provide or whether a financial product is "suitable" or "appropriate" to that client. Firms are also required to secure "best execution" in relation to a client's trade order depending on the client categorisation. Again, robust IT systems and information management are likely to be important, as firms must have the means to accurately reconstitute such execution information in the event of any investigation.
Whilst many aspects of MIFID may not be an entirely new departure from previously existing UK regulation, the effects are still likely to be strongly felt. Not surprisingly, many firms have been busy upgrading information systems to comply with MiFID requirements (at an one-off implementation cost estimated by the FSA to be around £1 billion). With the deadline imminent, many market participants are still scrambling to putting the necessary systems and contractual measures in place to comply with the new regime.