Compliance: Tech's 'uncomfortable' future
Published: 20 Mar 2006 13:50 GMT
The Markets in Financial Instruments Directive (MiFID) directive is expected to cost financial services organisations about $1bn ($600m) worldwide — with up to half that amount expected to be in IT costs.
MiFID is one of around 42 new directives that will hit the FS sector between 2005 and 2008, and according to Greg Caldwell, IBM's pan-European programme lead on MiFID, "is the most wide-ranging and significant to date", not least because it is a big step on the road to a single European market for financial instruments such as equities and derivatives.
The Directive, one of a set of initiatives to come out of the Financial Services Action Plan, which was agreed at the European Summit in Lisbon in March 2000, will replace the existing Investment Services Directive (ISD). It is intended to provide a homogenous framework for investment services to make it as simple to trade securely across national borders as it is to do so in individual countries.
This means that, it will become "as easy for you or I to phone a Spanish or Italian stockbroker as to phone someone down the road", explains Steven O'Sullivan, a partner at Accenture.
The goal, on the one hand, is to create a level playing field for organisations to operate in what has to date been a series of fragmented national markets in a bid to take on the might of a single, unified US market. The other aim is to increase transparency in relation to cross-border prices and fees — something that Brussels is currently unhappy with — in order to increase competition.
"The aim is to make it cheaper for capital markets to issue trades and to make it more attractive to investors by making markets more transparent so that they'll put more into equities to solve the pension time bomb problem," says Alan Jenkins, European head of MiFID at Bearingpoint.
As to what the Directive actually comprises, however, can be broken down into four main headings — organisational requirements; conduct of business (including best execution); markets and transparency; and cross-border business.
Organisational requirements cover areas such as risk management and internal audits, and although they have yet to be translated into practical terms by the Financial Service Authority (FSA), they will include tighter controls around potential conflicts of interest for those firms providing both investment advice and trading services.
Fields such as outsourcing will also be addressed by specific rules for selecting and testing the suitability of providers prior to contracts being signed, but record-keeping is another affected area. MiFID requires that a wider range of records than was previously the case be kept for five years, although again what this will include has yet to be determined by the FSA.
Conduct of business, meanwhile, affects everything from marketing and communications to changes in how clients are classified, the aim here being to protect retail investors and make a clear distinction between financial professionals and those less experienced.
The single biggest obligation in this area relates to best execution. This means that organisations not only have to define and publish a policy laying out how they intend to operate in the best way possible for their customers, but they also have to comply with it and retain evidence of how they have done so.
For retail clients, this relates mainly to choosing a financial instrument at the best price (including the exchange fee), but for professional customers, it also covers speed, volume and efficiency of the settlement process.
The third element of MiFID, however, only involves shares and introduces a new regime for execution venues. To date, only traditional stock exchanges have been highly regulated, but clear rules will now also apply to multi-lateral trading facilities or online exchanges such as eSpeed and TradeWeb and the newly created category of systematic internalisers. These are investment firms that will be allowed to act as exchanges for the first time.
The most onerous obligation for these organisations will be the requirement to publish pre- and post-trade records and report all transactions to the...
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