MiFID Implications

MiFID Implications

About MiFID

MiFID is a major part of the European Union’s (EU) Financial Services Action Plan (FSAP), which is designed to create a single market in financial services. MiFID is being adopted using a legislative approach known as the "Lamfalussy Process." This is a four level approach that starts with European Union directives issued by the European Council, followed by a more detailed technical guidance that constitutes the second level. The third level is the facilitation of coherent implementation and uniform application of EU legislation by the Member States. Finally the legislation becomes law and practice in the markets of the Member States.

The main aim of introducing MiFID is to create a single, integrated market for financial services to ensure that investor and intermediaries can transact freely with clients across all European members on the same terms & conditions as transacted in their home countries. MiFID directive has 73 articles. MiFID will recognize and formalize the regulation of Multi Trading facility (MTFs) such as Electronic communication Network (ECN), Automated Trading system (ATS), thus will increase the competition among stock exchanges, consequently providing greater revenue opportunity for other players in the market . The level of competition among stock exchanges and investment will also force them to become more efficient and productive, leaving them better able to face tough global competition.

The new legislation is expected to increase investor’s confidence through more transparency and integrity together with standardized and simplified information. Effective risk management system will ensure the investor protection competition in the financial market will help to reduce transaction cost and hence increase the return. Investment firm and other related firms, coming under this legislation, will get an opportunity to expand their business across the entire European Union. On the other hand, they have to invest a lot to meet the requirements as finally agreed in the level II measure.

Primarily estimated, the directive will cost investment banks up to £22 MM - with half of that spend going on technologies including workflow; networking; routing; service-oriented architectures; and data warehousing. Across Europe this is likely to mean spending of around $1 Bn to $ 2 Bn.

Need for Mifid

MiFID replaces and broadens the scope of the current compliance, Investment Services Directive (ISD), which came into effect from 1993. ISD establishes the conditions in which authorized investment firms and banks can provide specified services in other EU member states on the basis of home state authorization and supervision. Services eligible for a passport under the ISD include brokerage, dealing, individual portfolio management, reception and transmission of investor orders, and underwriting/placing activities. The ISD also contains the right of direct or remote access of any authorized ISD firm to participate in trading on exchanges or regulated markets in other member states.

The ISD has had limited effect in creating a true single market in investment services, firstly because the scope of investment activities to which it applies is narrow, and secondly because whilst Member States are required to permit EEA-regulated investment firms to passport into their jurisdiction, they are not prohibited from imposing additional local rules governing the manner in which those services may be provided.

This lack of harmonization, coupled with a growing awareness that the technology of investment services, and the financial markets gener-ally, had developed considerably since the early Nineties when the ISD was enacted, led the EU to revisit the investment services sector. When the FSAP was announced in May 1999, at the top of the list for action in the wholesale markets was to “prepare the ground for the effective cross-border provision of investment services” by “urgently updating” the ISD. Accordingly the updated legislation MiFID the level I directive was adopted in 2004 and the level II the implementing directive is expected by November 1, 2007.

The new legislation MiFID which replaces the existing ISD aims to build a single, seamless financial services market in the European Union. MiFID represents the biggest change in financial markets legislation. MiFID strives to ensure that market participants can interact freely with counterparties in other EU countries on the same terms and conditions as they transact business in their home country.

Mifid Timelines

The compliance deadline for MiFID has already been moved back twice. First it was moved to April 2007 as the European Commission (EC) recognized that the industry still had a lot of work to do if it was to meet the new requirements. Then it was further extended to 1 November 2007, under the auspices of the UK presidency of the European Council.

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