Wednesday, April 25, 2007

The MiFID debacle

I have managed to avoid writing anything about MiFID for the last few weeks, but I am forced to put pen to paper in light of recent speculation surrounding CESR's recommendations for best execution under MiFID, and an overwhelming perception that as far as regulation goes, MiFID has been a debacle from day one.

Bearing in mind that certain aspects of the regulation itself continue to suffer from a lack of regulatory clarity and detail, and the fear that some national regulators, particularly in those countries that will not transpose to MiFID on time, will lend a different interpretation to MiFID guidelines, it only serves to fuel my belief that the transition to MiFID will be anything but smooth.

With only three countries (including the UK) successfully transposing MiFID into national law by the 31 January deadline, how can regulators deem MiFID's implementation anything but a debacle of major proportions?

To add to their woes, SunGard and TradeTech have just released MiFID readiness survey findings which indicate that only 13% of financial services firms are confident that they are on track to meet new MiFID regulations. More than 60% of firms indicated that their preparations still required some work, which is hardly surprising.

Forty six percent of those surveyed by SunGard and TradeTech expressed concerns that their own national regulators would "add further complexity" to MiFID through the imposition of national laws and additional guidance.

Furthermore, whilst some clarity may have emerged surrounding best execution requirements under MiFID, rumour has is that the Committee of European Securities Regulators' (CESR) final recommendations on supervisory treatment of best execution under MiFID, are not in accordance with those of the UK's Financial Services Authority (FSA).

Apparently the UK is perceived to be way ahead of other European countries based on the government's acceptance of Paul Myners' recommendations for institutional investment decision making, and the belief is that it will take the rest of Europe a long time to catch up.

Furthermore, the mind can only boggle at the plethora of pre-trade reporting initiatives that may emerge post-MiFID and the implications for firms looking to consolidate all this data.

Marcus Hooper, who is the author of various white papers on MiFID published by Equiduct, says "few comprehensive solutions have appeared" with respect to the issue of managing increased fragmentation of pre-trade information under MiFID.

Hooper anticipates that firm’s sources of pre-trade information will "change significantly" under MiFID to encompass the existence of multiple systematic internalisers, who he says are not obligated to use identical
information distribution systems, increased multilateral trading facilities and firms with more than one secondary market listing.

The resulting connectivity diagram looks anything but streamlined and simplistic and Hooper says firms have one of two options; they can either find a way to
consolidate pre-trade information, or restrict information to a smaller number of "information delivery mechanisms", which may not be so desirable when it comes to demonstrating "superior execution".

Hooper's latest White Paper entitled: "Pre-trade information and the advantages of consolidated data" can be downloaded from Equiduct's web site.

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