The IT implications are mind-boggling but already the likes of MiFID Connect and the MiFID Joint Working Group are busy advising on what should be done. By Michael Imeson.
MiFID will have IT implications for all investment firms. Some will be affected more than others, in particular broker-dealers and global investment banks on the sell-side, which will have to understand and comply with the directive’s requirements for ‘best execution’ and ‘systematic internalisers’.
Best execution means a firm has to take all reasonable steps to get the best possible result for its clients, taking into account price, cost, speed and the likelihood of execution and settlement of orders. A systematic internaliser is a firm which, on an organised, frequent and systematic basis, deals on its own account by executing client orders for shares outside a regulated stock exchange or multi-lateral trading facility (MTF). In other words, it routinely crosses clients’ buy and sell orders. Systematic internalisers will have to comply with specific pre-trade and post-trade obligations.
Biggest headache
Investment firms that have to meet these two requirements will face the biggest IT headaches. The areas of IT affected include order management systems, algorithmic and program trading, pre-trade and post-trade transparency, data management, physical networks and enterprise-wide integration.
Firms will need to ensure their order management systems incorporate routing flexibility across multiple trading execution venues (ie: exchanges, multi-lateral trading venues and systematic internalisers). These will need to operate in real-time to ensure that they meet the ‘best execution’ requirement of the directive to provide all the necessary data on prices, costs, speed and other factors.
They will also have to use more algorithmic and program trading engines to comply with best execution and to facilitate quicker post-trade reporting.
Systematic internalisers
Systematic internalisers will need systems that can meet all their pre-trade transparency obligations to provide a firm bid and offer quotes in liquid shares. The quotes, subject to certain waivers, must be binding for trades up to certain thresholds. Systematic internalisers will also need systems that meet all their post-trade transparency obligations, which are that they should publish specific information about completed share transactions in close to real-time. This information can be published on exchanges, MTFs, other third-party channels or on proprietary channels.
Reference data maintenance tools and data reporting tools will need to be enhanced to incorporate more trading venues, to meet the best execution requirements for providing quotes and to meet the transaction reporting requirements (ie: reporting transactions to national regulators, not to be confused with publishing post-trade information on exchanges or through other commercial entities). Data processing, storage and retrieval will have to be improved. Firms will have to store price and other data from their trades for five years and be able to retrieve it to meet customer and regulator requirements.
The physical network underpinning the IT architecture will need to offer multiple venues throughout, with contingency and recovery procedures in place.
Enterprise application integration will have to be accelerated. There will be a need for more interfaces within the firm (such as between order management systems and algorithmic trading platforms) and outside with data vendors, quotation publishing locations and execution venues.
Association advisers
n the UK last year, 10 trade associations jointly created MiFID Connect to advise firms on aspects of implementation. They include the Futures and Options Association, British Bankers’ Association, International Capital Market Association and London Investment Banking Association. The group is now setting up an IT support group.
“The purpose of the IT support group will be to ensure that the various IT implementations are productive, sensible and cost-effective,” says MiFID Connect chairman Anthony Belchambers. “It will match firms’ commercial priorities for MiFID with what their IT departments can deliver. At the same time, external providers of IT services will loop into that process.”
There will be a dialogue with the MiFID Joint Working Group (JWG), a pan-European alliance of financial services IT associations created in May 2005 to address the technology-related compliance requirements of the directive. The four founding associations are FIX Protocol, ISITC Europe, the Reference Data User Group and SIIA/FISD.
Pressure pays off
The JWG managed to achieve some changes to the draft implementing measures before they were published in February, in particular on the definition of real-time, which will reduce the burden on firms. Its focus now is on advising investment firms how to make the IT changes needed to comply with MiFID.
However, it is not just a regulatory compliance issue. Commercial opportunities will arise from this regulatory change, such as investment banks becoming systematic internalisers and being able to trade more easily across a harmonised single market. These opportunities can only be fully exploited if business and IT are properly aligned.
Michael Imeson is a contributing editor to The Banker.
