Through MiFID, the European Commission seeks to open up market competition and harmonise standards in order that participants can operate on a level playing field across Europe. By Jules Stewart.

In terms of impact, the Markets in Financial Instruments Directive (MiFID) is likely to rival the Big Bang, London’s 1986 financial markets de-regulation. Implementation of MiFID has been under way for some time and the directive represents one of the cornerstones of the EU’s strategy to establish pan-European capital markets, replacing and expanding on the Investment Services Directive.

“There will be winners and losers coming out of MiFID,” says John Liver, partner in risk and regulatory services at Ernst & Young. “The basic point is to allow for more pan-European business and there are many ways for firms to increase their presence in this market.

“This mainly affects the investment banks, while for retail banks it represents less of an opportunity. Some of the areas that will be immediately hit are the trading environment and the cost and accessibility of data.”

The heart of MiFID is the removal of the concentration rule. This means an investor can buy shares that are listed in particular countries in locations other than in those countries’ stock exchanges.

“You can buy Belgian shares directly from an investment bank in London and the trade can be matched up with a seller by that same investment bank without going through the Belgian Stock Exchange,” says John Tattersall, head of financial services regulatory practice at PricewaterhouseCoopers.

Level playing field

MiFID is purely a single market initiative. The aim of the directive is to create total neutrality in the shares of all listed companies, be they Belgian, French, Slovenian or Hungarian. Banks and brokers see this as a cost savings opportunity, as it eliminates the need to pay hefty fees to national stock exchanges, pre- and post-trade. However, it remains to be seen to what extent these savings in transaction charges will be passed on to the customer.

Common rule set

MiFID aims to bring all the European countries into line with what is perceived as best practice. Essentially, the European Commission wants to ensure the rules on dealing are the same across all markets. It sees a need for this in order to remove the artificial barriers to open market competition and harmonise standards in which participants can operate on a level playing field across Europe.

“A major risk is the delay in publication of the legislation,” says Duncan Higgins, chief operating officer, European client trading and execution at UBS Investment Bank. “If the legislation in Europe proves to be different to the UK, we could be at a competitive disadvantage.”

Mr Higgins says that in this fiercely competitive business, UBS has been investing in technology and systems to improve execution quality. “The change of the regulatory framework and market structure further raises the technology requirement,” he says.

“The pressures on the buy and sell-side will be greater and they’ll have to analyse what they do much more carefully. It means that the buy-side needs to analyse why it deals with certain brokers and will have to have greater understanding of analytics, particularly pre- and post-trade.”

The investment banks and some of the bigger fund managers have been looking at ways of turning MiFID to their competitive advantage. One way, according to Dr Anthony Kirby, head of risk, regulation and compliance at Accenture, are hosted execution services, that is the ability to carry out execution almost on an industrial scale, linked in with client classification.

“A dealer in the fixed income market, for instance, has immense information advantages that a smaller player might not have and therefore can decide to outsource some of that activity,” he says. “Therefore the advantages to a large market player in best-execution would be to host these types of services on behalf of other smaller brokers as well as clients.”

The banks are actively engaging their clients in presentations to explain the nuts and bolts of MiFID. “We’re hosting a conference in London with more than 200 clients in attendance. We’ve been running a programme of one-on-one meetings with our leading clients in the UK and Europe,” says UBS’s Mr Higgins. “We are also running conferences in half a dozen European capitals in the coming weeks.”

Jules Stewart is a contributing editor toThe Banker.

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