Significant Impact Within 12-18 Months: The Effect of MiFID

London - 27 September 2007

Europe is eagerly awaiting the full implementation on Nov. 1, 2007 of MiFID. Having been on the statute book since April 21, 2004, the European financial community has been busy preparing for it ever since. In an insight released today, leading management and technology consultancy BearingPoint states that whilst the directive will be up and running in the 30 individual markets by early 2008, it will be 12 to 18 months before significant and lasting impact is felt.

“MiFID beyond 2007: Impact on market structure”, states that whilst the deregulation of the London Stock Exchange 20 years ago transformed the market within weeks, the full effect of MiFID will take considerably longer to have such an impact.

One key challenge for financial services institutions will be their ability to absorb a massive increase in data. BearingPoint believes institutions should expect a fourfold increase in pre-trade data, and a doubling of post-trade and static data due largely to more frequent price updating by existing venues, and the emergence of new venues, including multilateral trading facilities and systematic internalisers.

The rise in new execution venues will also make it more important for investment firms to provide smart order routing. Under MiFID, firms will have to seek the best offer across a number of venues, and after the first year it will be incumbent on them to review their selection, as well as to document the criteria on which they have selected those venues. New market entrants will naturally need to be included in this consideration.

BearingPoint goes on to state that whilst there is likely to be an explosion of data and an increase in the number of execution venues in the first 12 to 18 months, it is likely that thereafter the pendulum will swing back as financial services firms start to feel comfortable with which venues are the most efficient. Similarly, pressure for transparency in clearing and settlement will lead to consolidation in the market making life more difficult for the smaller, traditional, national infrastructures, which will be in danger of loosing out to new pan European providers.

Alan Jenkins, European lead for MiFID at BearingPoint, comments:

“Of course, what every player in the European financial community wants to know is who wins and who loses once the dust settles. Similarly there is the question of how those outside of the European Economic Area, especially the tax havens of Monaco, Jersey and Switzerland, will fare once MiFID takes full effect. Will investors be attracted to the lean and mean firms that these geographical pockets can continue to support, or will they prefer the protection, and cost, that MiFID regulation affords? Certainly there are lessons to be learned from the US authorities whose implementation of Sarbanes-Oxley led to many firms listing in Europe rather than the US, due to ‘over-regulation’. Will MiFID have a similar effect? Only time will tell.”

The paper also examines what the technological challenges posed by MiFID will be. Whilst some of these including standard protocols, the formatting of transaction reports and the adoption of cross-asset class service-orientated architectures are starting to become clearer, it is less clear whether MiFID will spur firms to outsource some of the processes the directive requires.

Some analysts believe that MiFID rules on the outsourcing of technology solutions will make it more difficult and costly to outsource. However, BearingPoint outlines how some outsourcers providing MiFID-supported services will become experts in the new regulatory requirements and how, as a result, they will gain business from financial services firms that do not want to make the investment in coping with the new rules in-house.

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