We’ve seen the scary trailers for MiFID (known to equity traders as ‘Day of the MiFIDs’ after the 1960s sci-fi movie). But are we ready for the sequel, which will target bond and derivatives markets?Michael Imeson investigates.

What is it?

It is the probable extension of the transparency provisions in the EU’s Markets in Financial Instruments Directive (MiFID) to cover bonds and derivatives. The provisions currently cover only equities.

MiFID will harmonise securities regulation and investor protection across the EU when it comes into effect in October 2007 (see Reg Rage, The Banker, 10/05). It will, among many other things, impose full transparency and more investor protection on over-the-counter (OTC) equities and equity derivatives markets. Investment firms will no longer be able to hide pricing margins from investors and will have to invest millions in massive data storage and indexing. All this extra information swilling around would also put customer confidentiality at risk. As it stands, MiFID will not apply the same transparency regime to bonds and derivatives markets – but the planned follow-up probably would.

Who dreamed it up?

MiFID was produced by the European Commission and directed by the Committee of European Securities Regulators. Article 65(1) of the directive requires the commission to submit a review to the European Parliament on the possible extension of the scope of the transparency provisions to markets other than equities. The commission is therefore reviewing the bonds and derivatives markets, is taking submissions from affected parties and will issue proposals after April 2007.

What are the main proposals likely to be?

They will probably mirror those applying to equities. This means they would force traders who trade off their own book in a significant way to publish all their prices for all their pre-trade and post-trade dealings. Traders would have to store these prices and be able to prove that they have given investors the best advice and “best execution”.

What’s in the small print?

This is the small print.

What does the industry say?

The International Capital Market Association (ICMA), London Investment Banking Association, Corporation of London, Association of British Insurers and Investment Management Association have joined forces to argue that bond markets are already relatively efficient, that more transparency will not necessarily improve efficiency and that further transparency should be allowed to evolve naturally.

They have commissioned research into how extending MiFID in this way would affect European bond markets. The findings will be published early this year.

How much will it cost?

Atos Consulting estimates that, in the UK, MiFID as it stands will cost investment firms, regulated markets and their clients about £1.5bn and, if extended to other markets, the costs would be even greater.

What do the regulators say?

Extending MiFID to cover other markets would be a logical and necessary extension. MiFID is necessary to harmonise securities regulation and investor protection across the EU. It will not only benefit investors, but will also benefit investment firms by allowing them to provide services on the basis of their home country supervision.

The law of unintended consequences

OTC trades in bonds and derivatives would become less attractive for sellers and produce uncreative offers that are priced to market, just as they will for OTC equities trades. Buyers would move to automated dealings, which could put a lot of smaller investment firms out of business.

Could we live without it?

Yes, but we could also live with it. ICMA notes that the bond markets “have survived and prospered under MiFID’s earlier incarnation, the Investment Services Directive”.

Rating: 3

Rating scale: 5 = Essential, but costly. 4 = Useful, but costly. 3 = Neutral, but costly. 2 = Unnecessary, and costly. 1 = Waste of time, and costly.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter