Do we need an idiot's guide to MiFID ?

30 October, 2007. MiFID will happen in less than 48 hours from the time I am writing this. How nice of the Financial Times to dedicate one page to MiFID and a full section of the Lex Column to a "Mifidiot's guide".

The conclusion in this guide is that MiFID is a "one-off, back-office event". Well, this is interesting to learn for those who have spent time, efforts and money in other areas of any investment firm. JWG-IT (www.jwg-it.eu) has a very interesting diagram showing all the areas affected by MiFID and it is goes way beyond the back office. I wish I could share the optimism of MiFID being a one-off, it will not be possible to see the effects of some of the major changes brought in by MiFID until way into 2009, therefore we shall see a MiFID II and maybe a MiFID III when it will be possible to assess some of the changes introduced post 1 November (also, there are two major reviews planned for 2008 - commodities and fixed income transparency - so there goes any hope for a ‘one-off' change).

The same guide shows a major lack of understanding of the core impact MiFID will have on the financial industry. Splitting listing from trading mean that you do not have to list in the same jurisdiction that also ‘hosts' the major market for your shares. As I wrote a few months ago "Shares listed in Finland could be traded in Portugal, a company listed in Cyprus could be traded in Iceland and everything of any liquidity will be traded in London." (see my blog "Vision of a post MiFID Europe" ). Some regional stock exchange may emerge as a major "listing hub" for Europe and market concentration may follow different pattern of investment in different parts of Europe.

Major consequences for Front Office people have been overlooked, one of the challenges will be coping with what to say to clients that may occasionally make execution only orders and occasionally seek investment advice and with clients that are classified as ‘retail' for one financial instrument and ‘professional' for another.

Is there a market out there for an idiot's guide to MiFID ? Maybe, but it has to be an accurate one.

A double espresso in the MiFID Starbucks!!!

Just to wake you up!

Time goes by and yet MiFID still refuses to go away (By the way, do you realise there are now less than 100 calendar days to 1 November ?). There are urban legends that are still doing the rounds of city institutions:

· “Professional Clients are exempt from Best Execution”,

· “xyz has a standard MiFID compliance package that will be available in October”,

· “We are not really affected by MiFID, we are the branch of a non-EU institutions and although we do operate investment business from London MiFID is not really our problem”

· “MiFID is just for exchange traded instruments” was still heard last week (although I admit it was the only time in the past four weeks)

… and the award definitely goes to

· “Nobody in *** (put a firm type here) can really comply with MiFID and therefore we are not doing anything yet until we know where the wind blows.

Why is it that three months from a major regulatory deadline (MiFID) and five months from another deadline (CRD) very few compliance officers are worried or even afraid of losing their jobs? What about IT infrastructure? And how will every client facing person will behave if the in-house ‘MiFID guru’ does not share his/her knowledge?

First wake up call: It does not matter what happens to other jurisdictions within the MiFID area. If you are based in the UK, MiFID is the law of the land! So you have to get on with it (amazing how the recent Sungard survey fails to point that out when they ask the relevant question).

Second wake up call: All the relevant authorities are sending out clear messages that there will be no extension of the deadline. The messages are getting clearer and clearer and a lot of jurisdictions are planning summer blitzes to transpose by the end of September (whether they will all achieve it is another matter, but then the first wake up call still applies)

Third wake up call: It is not just MiFID, s****** ! CRD (Basel 2) has to be implemented as well, then you have AML rules, etc., etc… You have better take a comprehensive look at the whole regulatory environment if you do not want to run the risk of starting all over again.

And yet there are still things that need clarification and even more things where confusion reigns due to misunderstandings of clear rules. For instance, market making will change and the role of a systematic internaliser should be examined very closely (some institutions out there may actually have to become one if they want to continue market making), however the buy side has no interest in internalisation (another question that the Sungard survey gets wrong).

All of this should not be an excuse for slow action and lack of preparation. The two surveys recently published by Sungard and Thompson/IFR agree that institutions are not ready (although the population of respondents is not really huge. Sungard claims 300 respondents from Financial Institutions, Vendors and Consultants based in the EU, America, Asia – hardly a cohesive sample - and Thompson/IFR had less than 100 respondents, although from Tier 1 and Tier 2 institutions with the majority based in the UK - a more consistent population of respondents).

One thing is clear. Larger firms are getting ready. Smaller firms need to get a move on. The risk is not decreased competitiveness in the market; the risk is not being able to operate in the market at all. And whose head will roll when that happens?

Vision of a post MiFID Europe

In the past few weeks I have been a member of two panels discussing life post MiFID and I have been in the audience when the same was discussed four more times in different venues in the UK, Germany and Italy.

After a while, it gets boring; you keep hearing the same thing and you wonder how many people have actually missed the point. MiFID separates listing from trading, one of the most important thing that will happen in post MiFID Europe. Shares listed in Finland could be traded in Portugal, a company listed in Cyprus could be traded in Iceland and everything of any liquidity will be traded in London.

Equities are the easier example to make at the moment, bonds and other fixed income instrument (a favourite component of most investment portfolio in Germany, Italy, France and several other European countries) will follow quickly and other financial instruments will follow more slowly.

The London Stock Exchange could be in a fantastic competitive position; it is widely respected, it currently serves the largest financial market in Europe (well, actually in the world) and it currently boasts an acquisitive attitude in Europe (see recent announcement of a ‘merger’ with the Milan Stock Exchange). And yet, all we here from the LSE is how it will compete with Chi-X (something already working), Equiduct (something not really working yet) and other MTFs in London. Why? It should be out there with the most aggressive players in Europe. It has the name and the clout to start trading in large, liquid European Shares from November 1st. And yet, we only hear how its costs will be comparable with other trading venues in the UK. Why is it so inward looking? Also, why does it seem to be so blind to the risk of other Stock Exchanges taking the lion’s share of listing in Europe? That might also happen.

Yes, things will not change much on November 1st. However, the process will trigger changes. New trading venues will appear, it will be more complex to trade OTC and therefore there will be a push towards Exchange Traded Instruments and therefore more financial instruments will find one or more trading venues. It will be easier to start operating in different jurisdictions, so country with a relatively saturated market (e.g. the UK) will see their institution trying to expand in markets with a high degree of savings and therefore a cash rich pool of investors willing to listen to new ideas in wealth management (e.g. Northern Italy, most of Germany, etc.). Institutions based in such countries will have to start looking outside their immediate territory for growth opportunities. Institutions based in tight regulated markets (e.g. Landesbanks in Germany) will find it difficult to compete with newcomers that do not have the same limitations from their home regulator, etc. etc.

This will alter the face of the investment industry in Europe, not the endless conversations about degrees of best execution or where to report transactions or what suitability and appropriateness means in the context of investment advice (actually in some languages there is only one word for both concepts). Equally the main financial pain for financial firms will not be a fine from a regulator but a disgruntled client (or group of clients) taking them to court for breach of best execution principles.

The dust created by MiFID will rise in the European financial world like sand brought in by a desert storm. When the dust will settle we shall see a different financial industry in Europe all the current squabbles will have revealed themselves to be just hot air (which incidentally will extend the time required for the dust to settle)!

MiFID, Y2K and regulators

An anonymous reader of this blog posted a comment to 'MiFID time to stop talking and start acting', where they make an interesting parallel between MiFID and Y2K, they write: "Deadlines that a large number of people/orgs don't take seriously have a tendancy to slip back several months or years until they do." . I disagree.

One of the big question mark in the MiFID saga is the future attitude of regulators. What will they enforce ? Who will they target for enforcement ?

Some regulators run the risk of being the target of enforcement procedures themselves; but will they use enforcement as a way of creating 'hidden gold plates' ? After all if you are determined to preserve concentration, one way out of it is to quietly allow operators in your territory to have just one trading venue. (As somebody else wrote in another blog: Financial TechInsider).

As far as concentration is concerned I am a firm believer that ultimately the market will take care of it but on other part of MiFID the question is perfectly valid. Will regulators follow the example of the FSA (who has recently adopted a much stricter attitude towards November 1st as a deadline) when they themselves are spectaculary late ?

Who will they pick first when they decide to get tough on non compliance ? what will they decide to be tough about ?

Ultimately, I think that the biggest threat looming over non compliance is not a regulator, it is a client loosing money and taking an institution to court for breach of best execution.

Regulatory Cocktail and reference data hangover

I had dinner with a friend currently in London on business. He works for a coffee company who is planning an acquisition in the US. (Be patients, it is relevant). The company regularly trades coffee futures and therefore it will be carrying out investment business under MiFID. To ring fence the main company, they decided to create a trading subsidiary which will seek authorisation from the local regulator and of course by then will have to be compliant with MiFID and CRD (Basel 2). If the acquisition goes ahead SOX will also come into the picture. What are the potential consequences of this regulatory cocktail ? (Other than mass resignation, professional suicides, etc.)

Well MiFID and Basel 2 both call for Risk Mitigation functions and some of the organisational issues must be tackled with both in mind (no point doing one thing for MiFID and then starting all over again for Basel 2). As I pointed out in an earlier blog (Are you pulling up your SOX on MiFID) MiFID and SOX do not really cross path, except they both require an 'audit trail' and one has to be careful that the two live side by side in perfect harmony.

A common ingredient of this regulatory cocktail and possibly the main thing that needs to be considered with all three in mind is data storage. MiFID, Basel 2 and SOX have their data storage implications. Storage in itself is not a major issues, the issues is retrieving those informations in the appropriate way.

The three have different 'retrieval' logic : with MiFID you need to retrieve every information that proves best execution or compliance with your corporate policies without any shadows of doubt (in other words, no cracks that would allow the opposite legal counsel to make mincemeat of yours), therefore you need to save not just the transaction details but all the policies and procedures effective on that date, what conversations you have with your clients, etc. ; SOX is interested in corporate governance and therefore you need to retrieve what proves that everybody at the table had nice manners and did not do anything they should not have been doing (such as sending corporate funds to the Cayman Island or buying a Van Gogh with corporate funds and have it hanged in their living room); Basel 2 needs to build a risk history.

It make sense to create one storage/retrieval policy and the relevant set of reference data. This is where things get really tricky, the coffee company where my friends works has already set up the trading subsidiary and they want to be operational by November 1st. That means being compliant with CRD by January 1st and if the acquisition goes through SOX will join the party.

Reference data are the backbone of a corporate IT system, they have a few months to change their backbone. We should wish them well.

Wake up !

I have already quoted the FSA MiFID Permissions and Notifications guide and how the FSA has clearly changed its message (the paper is full of "If you want this to be effective by November 1st you have to ... by...") several times. Last Friday I was talking to quite a number of bankers in London and around Europe. Some were cold calls for my teleseminars (and therefore their answers could be biased towards getting rid of me), others were arranged conversations for a book I am writing on cross jurisdiction banking in Europe post MiFID and three were conversations with people who had called me. At the end of the day I started thinking that maybe I was on another calendar, if not on another planet.

Too many people from smaller institutions have not started yet! They face some major risks:

1) The client categories do not map 1:1. Retail will stay Retail, but Intermediate may map to Retail or Professional depending on whether the corporate client meets the new criteria to be eligible either to be a Professional Client or to be upgraded to Professional Client. If a company that currently has a permission only for Intermediate (which will be mapped by the FSA to Professional), they need to submit a Variation of Permission Application by August 1st. The FSA quite clearly states that those who need to apply for a permission for Retail Clients for the first time need to have clear evidence of process and procedures being put in place to deal with clients that need more protection. If they only deal with intermediate clients they are unlikely to have those process and procedures. So what is going to happen on November 1st, if they are do not have completed client classification, process and procedures by August 1st ? Well, it depends on the magnanimity of the FSA....

2) They have clients based in other jurisdictions. MiFID has two passporting regimes: physical presence (branch passport) and cross border services (service passports). This means that a firm with clients based in another jurisdiction within the MiFID area should apply at least for a service passport. Existing passport status will be mapped post November 1st but there may be a need to revise it depending on the financial instruments and the services provided. The sticky point here is for firms that operate with agents. Introducer will not be affected but tied agents will be like branches and therefore will require a full branch passport (maximum processing time is five months, so if you are in that situation... better send your agent on holiday between November 1st and the time you have sorted all the paperwork!)

3) They are outside MiFID. Well... MiFID client classification criteria are now part of the new COB. You just have some more time, i.e. the transitional regime will last till July 1st 2008 but if you need to make a VOP (Variation of permission application) you have till January 1st, 2008 to do that. In other words, you have about five to six months to re-classify your clients and see what happens (this is especially important to financial institutions that do commercial loans, trade finance, etc. and have a permission for intermediate clients only)

The second group that shocked me is... non EEA banks. At least a dozen executive I talked to told me that MiFID does not concern them, because they are not a European Bank (some of these banks have large investment banking operations based in London and others have branches all over the MiFID area). Well... first of all this is worse than hiding their head in the sand. If they are based in London, with an FSA supervision...MiFID is the law of the land in the UK ! There are no indications that November 1st deadline will be postponed or otherwise made ‘more flexible' than what it is right now.

Third group... bankers from some EU countries. An Italian banker (Consob has committed to transpose by the end of June and most Italians think it will happen by September) - the head of Legal Services of a major group who called me asked me "Why he should know about MiFID"; a smaller German bank has not started on anything because MiFID "it will not happen"; a Luxembourg based buy side institutions is not doing anything because "very few countries have transposed yet". All of this was supplemented by a conversation with PJ Di Giammarino of JWG-IT where he added a few stories of his own to my list.

In Greek mythology, Cassandra did not end up very well in spite of her ability to predict the future. I am no mystic Meg or Cassandra, but I think we shall see a rush of transposition by the end of September. If the FSA is any indication of the attitude of regulators in Europe there will come a point at their discretion where their attitude will change and they will issue their own guide that says what you need to do by when if you want to be operational by November 1st. So, who will wake up in a cold sweat on November 2nd? Recently NASD fined HSBC $250,000 for breach of best execution is that a harbinger of things to come in Europe for next winter? Will European financial services have ‘A Very Cold Winter' this year? And what will happen to commodity traders (Oil Companies, Energy Traders, etc.)?

Well, my Crystal Ball is getting a bit foggy now but I definitely think it is time to wake up!

MiFID - Time to stop talking and start acting

The MiFID Permissions and Notifications guide recently published by the FSA gives a few indications as to how the FSA intends to manage the transition. So, what could be the potential issues behind a set of very tight deadlines ?

Client categories and mapping of permission. The FSA will map permission in a very clear cut basis, i.e. intermediate = professional, etc. Unfortunately the criteria to place clients in one category or another under MiFID do not exactly match the criteria currently being used under the ISD and BCD rules. Corporate clients usually were classified as intermediate, MiFID sets clear guidelines to decide when a corporate client is a professional client and when it is a retail client. So what happens if some of your client have ‘gone retail' and you cannot justify moving them to professional status? You should submit a VOP (Variation of Permission) application by August 1st, unfortunately the paper also says "If you apply for permission to deal with clients requiring higher level of protection, for example where a firm is dealing with retail clients for the first time, you will need to demonstrate to us that you have the necessary systems and controls in place to do so". Therefore your deadline of August 1st is not just for an application, but it is also for the "necessary systems and controls" that must be in place, or at least on their way to be "in place" by November 1st. The same chapter clearly states that even if you do not do MiFID business you will have to change your classification criteria eventually, with the deadline being July 1st, 2008 and the deadline for VOP applications being January 1st, 2007.

Passporting. If you do not do MiFID business and wish to ‘opt-in' to benefit from the advantage of passporting rules under MiFID or decide to opt-out of the exemptions you have an interesting situation if you want to have your non-UK operations up and running by November 1st. You should send your application immediately (MiFID sets out a maximum time period of five month for both home and host regulator to process a branch passporting notification). If you are already passported and you do not wish to extend your passporting to other financial instrument beyond the FSA mapping, you are fine. Otherwise act now. If you plan to work with tied agent outside the UK, a tied agent is considered a branch and will require passporting (and therefore following the five months maximum processing period, act now). If you are one of the "new" investment business (Commodity broker, spread betting, etc.) and need to passport - even if it is a passport for services, not a passport to open a branch - you should start working at it.

This two examples give you an overall idea of the change of attitude. The ‘transition guidelines' have arrived and it is now time to stop thinking and start talking. Each possible variation of permission application will require policies and procedures to be in place or at least will imply strategic and operational decisions which deserve to be taken with the relevant care and attention.

If the FSA is any indication of what will happen in the rest of Europe we shall probably see a ‘rush to transpose' over the summer and by October 1st a majority of EU countries will be "MiFID compliant". Leaving financial institutions to scramble to meet the November 1st deadline. Since the first tier institutions started earlier, they will be ready (or on their way to be ready). All those that are still ‘talking' rather than acting may have interesting surprises on November 2nd. I sincerely hope I am wrong, but... you read it here first

MiFID - it is really happening (aka the FSA changes tone)

Recently, the FSA has published a "MiFID Presentations and Notifications Guide" where they discuss in some detail what is changing with MiFID and what regulated firm need to do to be up and running by November 1st.

It is a complete change of tone from earlier publication, there is a sense of urgency (as in there is not an unlimited amount of time) and also a clear indication of deadlines for applications and notifications to make sure that business can be conducted under MiFID right from the start. Some of the deadlines to present such notifications or applications are dangerously close. Let's see :

Client Classification 1 - If your firm has a limited permission for Intermediate Customers Only you may need to apply for permission for Retail and Professional Clients since some corporate clients may 'downgrade' to retail following the MiFID rules. If this is the case, the deadline to submit a VOP application is August 1st

Client Classification 2 - Not really included in the guide but to be able to make a judgement call whether you need to apply for a different permission you need to have completed your client classification process (and all the other things that go with it, from conflict of interest to best execution policy).

MiFID exemptions - If you are marginally affected by MiFID or "you do not have a requirement not to hold client money on your permission" (I am quoting the FSA publication !) and wish to rely on article 3 MiFID exemption to fall outside MiFID, you should apply for appropriate standard requirement (by August 1st, 2007)

Passporting and Tied Agents - there are several deadlines around September 30th; however if you want to open a new branch or you want to operate in another territory throgh a tied agent (and be in business on November 1st), your application deadline for passporting is... May 31st !!! (This is because home and host regulators have up to five months to process an application to open a branch)

Systematic Internalisers and MTFs - Should we call this "Anyone for a trading venue ?" . If you want to be a SI you have to apply by August 1st, if you already are an ATS and would like to apply to be an MTF you do not have to do anything, if you are not an ATS you need to apply by... August 1st. On the other hand, if you are an ATS and you DO NOT WISH to be an MTF post November 1st you need to submit a VOP application not later than October 1st, 2007

And there is more.

By now you have noticed a pattern emerging, there is a new deadline August 1st. Two months away !

This is an interesting change of tone, until now the message was a bit bland. Now they clearly state that if you want to be able to do one thing or another on November 1st you need to apply by August 1st.

I am not sure about the practical consequences of this, deadlines for applications are somehow different from deadline for compliance. However it is quite clear that some decisions have to be made by August 1st and it is also quite clear that the FSA clearly indicates that it means business as far as non compliance goes.

I would not be surprised if we see a 'rush to transpose' during the summer and by end of September 2007 the majority of the main markets will have transposed.

What is now clear that the time to sit on the fence is running ou

MiFID expands the concept of ‘investment business’ – Part 2

This is the second of three parts that look into specific issues of trading in instruments that are in the list of MiFID and were not in the list of the ISD. Institutions dealing in those financial instruments face the need to implement MiFID and CRD (Basel 2) at the same time and therefore becoming compliant means a lot of work, with issues related to the specific nature of some of the businesses involved. This article looks at spread betting companies.

Annex I of the level 1 Directive published in 2004 lists contract for differences as one of the financial instruments within the scope of MiFID. Therefore dealing in contract for differences is an activity deemed to be an investment business.

This provision brings all the spread betting companies under the MiFID umbrellas. This presents a few challenges and several advantages. For once lets start with the positives.

A spread betting company is an online business 99% of the time. Once they are passported under MiFID they will be able to operate all over the EU (plus Norway, Iceland and Liechtenstein). Being an online business they do not really need branches, all they need is a telephone number for customer service in the relevant language and nowadays this can physically be arranged from their home country. Without a branch in a territory they can operate into that territory with the home Conduct of Business, therefore they will be able to advertise for the first time throughout the EU, proactively seeking clients in other European countries (rather than passively waiting for the clients to find them) and still work under UK conduct of business rules. Isn’t that great ?

The flip side of the coin is having to be MiFID compliant and CRD compliant. This present some interesting issues, first of all what are they ? Most of them write their own contract for differences (the spread bet) and have their own policy for margin calls, etc. They also tend to hedge their exposures but the two sides are completely independent from one another. So, you have an online platform for retail trader that trades only contract they have prepared. Are they a trading venue (e.g. a systematic internaliser) or are they an investment business engaged in proprietary trading? I leave it to the legal eagle to answer that.

Being on line they need to have a client execution policy that includes notices as to suitability and appropriateness of investing in contract for differences (most of their clients will be classified as retail clients anyway) and it could be argued that most of their transaction are on an execution only basis (nobody advises ‘me’ to bet one way or another, my own ‘bet’ defines the contract for difference that will be written and therefore there is no specific advice given). The relationship with their client is mostly online, therefore they need to post their policies on line and have to find a way to make sure that the client ‘pro-actively’ acknowledges them and agrees with them (this could be part of the registration process for new clients). Interestingly enough these issues are shared with any on line trading platform available to the general public irrespective of the financial instrument traded.

Their capital adequacy also presents interesting issues especially in the criteria used to mark to market their exposures. Another interesting side that covers both MiFID and CRD is Risk Mitigation and I wonder how they can relate their hedging policies to mitigation of financial risk and their business continuity solution to mitigation of operational risk.

Overall, this is a business sector that will have a lot to gain from MiFID (mostly thanks to passporting) and that explains why a number of industry professional I spoke to had an interesting upbeat attitude towards the whole thing (attitude that may not necessarily be shared by their compliance manager)

Anybody interested in being a trading venue ?

The FSA has a new list for Approved Reporting Mechanism (and why would you get there unless you were - or plan to become - a trading venue ?), there is a new interesting entrant: Credit Suisse.

Five months before November 1st, Project Turquoise is still a project, Chi-x of Instinet is being tested and some other things are appearing in other markets.

Credit Suisse being on the FSA ARMs list is the first example of a big bank 'declaring its hands', will they be SI or will they start their own MTFs. There is no rush to internalise and I suspect a lot of Market Makers still think they can go on market making as they do now post Nov.1st - at least in London. This could be another example of the 'to-morrow' effect on MiFID.

But why internalise ? or creating an MTF ? Well, two things come to mind. One is the intention to create a market in a specific financial instrument, create your own business hours and trading rules (market makers will have to operate through a regulated market and only during the market business hours. So, technically speaking, large transactions out of trading hours are out). The other is to stimulate a market in instruments not listed in the 'local' market (for instance Euronext shares in London or German Shares in Milan).

But also, what about instruments not currently traded in a regulated market in a specific jurisdiction ? (After all most commodities are traded in a couple of places around the world for historic or business reasons); and what about some of the instruments included in MiFID that were not included in the ISD ? Spread betting sites trade contracts for differences, but what is a spread betting site ? A broker, a market, or what ? (See the forthcoming MiFID expands the concept of investment business. Part 2)

So far most analysts have discussed the issues of competing with the local market (what Project Turquoise will do once it happens) but I think that the most likely scenario will be local access to instruments listed in foreign markets. Hard to say what will happen to non EU instruments but within the EU that may really increase the weight of London as a 'trading market' compared to the rest of Europe.

Of course, there is a lot of time to sort this, after all, it is just May and November 1st is about five and a half months away (please put a hint of sarcasm in here when you read this); this is probably the reason why only Credit Suisse so far has declared its hand. All the other market makers out there have a lot of time to think !

MiFID expands the concept of ‘investment business’ – Part I

This is the first of three parts that look into specific issues of trading in instruments that are in the list of MiFID and were not in the list of the ISD. Institutions dealing in those financial instruments face the need to implement MiFID and Basel 2 at the same time and therefore becoming compliant means a lot of work, with a lot of issues due to the specific nature of some of the businesses involved.

Annex I of the level 1 Directive published in 2004 lists all the ‘services and activities and financial instruments’ covered by MiFID. Underwriting or placing a financial instruments is clearly defined as one of the investment services and activities that defines an ‘investment business’. The list of financial instruments includes : (a) “Options, futures, swaps and any other derivative contracts relating to commodities that can be physically settled…” and (b) “Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climate variables, freight rate, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties…. , as well as any other derivative contracts relating to assets rights, obligations, indices and measures not otherwise mentioned in this Section that have the characteristics of other derivative financial instruments, having regard to whether… they are traded on a regular market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.”. Therefore underwriting or placing a commodity future became an investment activity.

So, if you are reading this from your desk in a financial institution spare a thought for commodity dealers and brokers. Their headache is slightly bigger than yours.

The FSA currently does not have dedicated rules for commodities and commodity derivatives markets. Its regulation is derived from several different regimes and its overall approach combines these. The implementation of MiFID and of the re-case Capital Adequacy Directive (i.e. the Capital Requirements Directive otherwise known as Basel 2) will significantly affect how the FSA regulates commodity markets.

The European Commission will report in 2008 to the European Parliament on a range of issues associated with commodity and other non-financial derivatives business. The Commission must decide which relevant firms, activities and instruments should be covered by the scope of EU financial markets regulation in this areas and if the current regulations need to be adapted to take into account the specificities of the commodity and commodity derivatives markets.

This will happen in 2008, MiFID will be effective from November 1^st , 2007 and the CRD from January 1^st 2008. So what is going to happen in the meantime ?

The questions behind an implementation of MiFID and CRD before the review varies depending on the nature of the firm and the business transacted. Also, CRD creates many more issues (and headaches) than MiFID.

A broker in commodity based derivatives working mainly with financial counterparty (i.e. clients that use the instruments clearly as an investment) will have less issues implementing the directive. Their business is basically a financial investment business and some of the principles behind the details of MiFID and CRD clearly apply to them.

CRD becomes very difficult to implement when we move to large commodity house that trade in their own account (say an oil company), there are several issues mostly due to the fact that CRD was that for a financial company, not for commodities. The two markets have clear differences. For instance :

In some commodities buying forward is the norm, for instance a coffee company would arrange a delivery plan with future contracts both as a way to cover against the risk of price fluctuation and to arrange a supply plan. Marking to market becomes a problem when you compare futures quotes with spot prices. Also, payment thirty days post delivery is the norm, that would be considered as a long term settlement. The other question is how far a Letter of Credit can be considered ‘risk mitigation’ rather than presenting a different risk in itself.

Operational Risk Requirements could be particularly onerous for those ‘producing’ companies (e.g. an oil company) that do not have a separate legal entity for trading. The Basic Indicator Approach requires a contribution to the reserve capital of 15% of income (a lot of money for the likes of BP, Shell, Centrica, etc.) and some Standardised Approach presents difficulties, mostly due to the different nature of the business (in other words, there is an obvious difference between trading commodities and trading money).

MiFID and CRD start have a fundamentally valid set of principles behind them. This is the case where there is a herd of devils in the detail (not just one). So what will happen ?

This is hard to say. The FSA helpline mentions a review and the deadline for comments was 30 April 2007, but still November 1^st and January 1^st are only a few months away.

If no special provision are made, a large commodity group could be in the same position as a financial house with a very large proprietary trading unit. Although the two business model could not be further apart, at the moment the range of possibilities between the worst case and best case scenario (in terms of time and efforts to become complaints) is very wide and, as yet, there is no real indication where the pendulum will stop. So, please spare a thought for the poor oil traders and commodity brokers who have a bigger headache than yours.

These are the headaches, would MiFID present any advantages to them? Clarity in the regulation may lead to a larger markets for commodity based investment products which could be marketed throughout the whole MiFID area (the EU plus Iceland, Norway and Liechtenstein). A level playing field across Europe comes to mind, MiFID will regulate activities across jurisdiction. It will be easier to operate from one territory to another, but does it really matter ? Stay tuned for Part II where I will discuss a business sector where it does (spread betting).

Once again, there is the need for a strong statement from the FSA over the transition period. Hopefully this will come once the Commission and CESR have examined the evidence gathered and everything will happen early enough to allow the affected business to have a realistic plan to become compliant in time.

Who is sorting out MiFID for financial institutions in London ?

I have been looking through roles posted by contract agencies in the two main job boards, jobserve (mostly IT role) and efinancialcareers.com . The picture they paint is interesting and worrying at the same time.

Some recent posting are looking for roles of Business Analyst or Project Manager for best execution and transaction reporting and conclude with variations on the theme of ‘knowledge of MiFID advantageous but not essential’.

MiFID is 60% process and procedures and 40% IT implementation. Unless all the process and procedures have been sorted (and if that is the case why looking for an interim Business Analyst) you actually need to know about MiFID to understand what is important or not in a best execution policy

MiFID changes the emphasis of best execution and the essentials ‘bookends’ for best execution are the preliminary guidelines, the choice of trading venue and the relevant provision of market data at one end and the trading reports on the other. Anything else is just… execution. You need to know the impact on the front office system of the new reality for market data (and therefore have an appreciation of the changes brought in by MiFID and therefore know MiFID), how to present information on quotes, liquidity and costs in an environment where there could be more than one trading venue for any given security and you need to know the impact of suitability and appropriateness, conflict of interest and client classification on the relationship between a trader and his/her clients. On the other side you need to know the fields in the transaction reports and the rules for the latency between execution and reporting. You need to make an assessment on reference data, etc. all things tied to MiFID.

Implementation of MiFID is full of things that are not completely clarified, others have been clarified in a way that cannot be immediately processed by the City. Recruiting professionals that are expected to learn MiFID on the job contributes to the confusion.

Isn't it a bit late to threaten legal action ? (sequel to MiFID.... and sex )

Charlie McCreevy is now threatening legal action if countries do not ratify the MiFID rulebook in time. (See the article on the Finextra website ) . The strong statement quoted in the article comes about six months before November 1st. The deadline for institutions not countries. As the FSA keeps telling us the UK was the only countru to ratify MiFID on time.

So, is there a mad rush out there ? Actually not, and it is not surprising. There are a few things tied to transposition (and ratification), the easier to discuss is transaction reports. Until a regulator has fully transposed, the information required may actually change and with that reference data, etc. etc. Therefore, until transposition an institution can only go by the EU directive and be prepared to implement changes. No wonder that there is not a mad rush.

A transaction report is one of the things a host regulator will require from investment businesses passported into their jurisdiction, if France has not fully transposed the delay in formalising a definitive requirement for transaction reporting does not just affect French companies, it will also affect any other institution with a presence in France.

Guidelines on transition become more and more important, the balancing act for regulators is to be pragmatic and assertive at the same time. This cannot be left to a case by case policy.

MiFID changes the way people involved in investment businesses will work, these changes will go beyond compliance with new regulation. There is a strategic element to MiFID that has to be considered when planning compliance.

All of this takes time, UK based institutions are still behind (the smaller they are the further behind they are) and they had about three months advantage on any jurisdiction that will ratify by the end of April. Institution based in other countries can learn from the British experience but however wonderful they are they will not be able to become compliant instantly.

It is time to define a 'core MiFID' where regulators will be strict for a period of say six months provided there is a plan in place to achieve full compliance (The FSA has already esplicitely stated that they will tolerate delays provided there is evidence of a plan to achieve compliant and a progress report to prove that the plan is being executed) without it threatening legal actions on countries will have no practical consequences for institutions doing business in those countries.

Why the lack of rush to be internalisers ?

Systematic Internalisers ? Who are they and why very few large players have declared their intention to become systematic internalisers ?

The MiFID directive defines a systematic internaliser as “an investment firm which on an organised, frequent and systematic basis, deals on own account by executing client orders outside a regulated market or an MTF” [ Directive 2004/39/|EC of European Parliament of 21 April 2004 Article 4 (7) ]

A lot of people think of a SI (common acronym for systematic internaliser) as a Market Maker, but MiFID defines a market maker as “a person who holds himself out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling financial instruments against his proprietary capital ay prices defined by him” [Directive 2004/39/|EC of European Parliament of 21 April 2004 Article 4 (8) ]

The differences between the two should explain why there has not been a rush to declare intentions to become systematic internaliser even in markets like London where market making is common.

What are exactly the obligation of a systematic internaliser ?

1) Publish Quotes

2) Pre-trade transparency reports for liquid shares (and although liquidity is centrally defined, single regulator can act on that definition in two ways, (a) when they transpose or (b) by specifically designating an otherwise illiquid share as a liquid share in accordance with Article 22(3)

3) Make trades public within three minutes of execution (this includes both liquid and illiquid shares) as part of the reporting obligations of a trading venue. They also need to make their market data available to the public at reasonable costs on a commercial and non discriminatory basis.

4) They also have to state their intention of being systematic internalisers and the specific security (or other financial instrument) they want to be systematic internaliser for. The relevant home regulator will keep a list of all systematic internalisers and that list will be made public by CESR (one of the first instances of an operational role as a coordinator of all the regulators). This list will have to be updated regularly and it will include the average daily turnover, average daily number of transactions and free float.

Limiting the disclosure to liquid shares is already a step forward towards transparency given that currently there is no such an obligation for large trades that happen outside markets (and they do happen). Information on illiquid shares can be inferred from post trade reporting.

So… a lot of reporting headaches, what are the strategic advantages in being SI ?

Let’s see what restriction do market makers have :

1) they still fall under MiFID (the exemption for persons who do not provide any investment services or activities other than dealing on own account specifically states “unless they are market maker or deal on own account outside a regulated market or an MTF [Directive 2004/39/|EC of European Parliament of 21 April 2004 Article 2 (1) (d)]

2) When the authorisation to operate a regulated market is mentioned in Art 1 (49) there is a specific reference to “the medium of designated market maker appointed by the regulated market” , therefore it could be inferred that a market maker is tied to a specific regulated market and therefore the interesting legal questions lies in “What happens if an institutions wants to market make securities listed in different regulated market ? Will they have to seek authorisation from all the regulated markets ? (If that is the case we have the first strategic advantage of being a SI, you only deal with your home regulator). There are several references in the text of MiFID to ‘registered market maker’

3) One of the other interesting issues is that the pre-transparency rules for a venue mean that they have to include the “best bid and offer by price of each market maker”, so indirectly a market maker is not exempt from transparency rules completely.

4) Even more interesting is Article 44 of Best Execution Rules (Best Execution Criteria) that states “for the purpose of this Article and Article 46, ‘execution venue’ means a regulated market, an MTF, a systematic internaliser, or a market maker, or other liquidity provider or an entity that performs a similar function in a third country to the functions performed by and any of the foregoing”. Yet again not much difference there.

The only conclusion to draw so far is that a market maker has to be designated by a regulated market and act in according to the practice of that market. A systematic internaliser does not have to be designated and can create its own trading rules – within the limits stated by MiFID - therefore an institution can be a systematic internaliser for shares listed on different stock exchanges and that may open opportunities for companies who have market making capabilities in several countries in Europe to be internalisers across jurisdictions.

So there does not seem to be much difference from an operational point of view, any legal mind that would like to join the debate will be mostly welcome.

After all, this is maybe one of the several instances of MiFID where an operation expert and a legal professional should work together to the best advantage of their client.

MiFID.... and sex

In Italian popular culture talking about the 'sex of angels' means having a very high level deep conversation with no practical consequences for your everyday life. Yesterday afternoon I was at a Reuters Forum on MiFID and although I usually find difficult to associate anything angelic with the City (or the FSA) I left with the nagging feeling that I spent the best part of four hours listening to people talk about the sex of angels.

I feel very sad that about 190 days before November 1st, the FSA still has speakers about MiFID that discuss high level things with no links to the practical issues faced by the financial communities in the UK (and in the rest of the EEA) that is trying to come to terms with implementing the directive.

After sleeping on what was said, I am left with two major thoughts; both equally worrying.

Regulators only think of transposition, in other words once the country has 'transposed' companies based in that country will become compliant very quickly, right ? Well... not exactly. To date only the UK, Ireland, Lithuania and Rumania have transposed and the UK was the first jurisdiction to achieve full transposition of MiFID into state law. Assuming everything is clear, and that is by no means the case, UK based companies will have had about nine months to get ready. Germany has not transposed yet, assuming they will achieve complete transposition by the end of July, German based companies will have only a few months to go before November 1st. It is unrealistic to expect them to achieve the deadline. Moreover I am increasingly unconfortable with a situation where the market is leading on 'nothing will change for a few months' rather than working under the thought leadership of the regulator.

The jurisdiction achieving transposition is the first stop in a journey, not the final destination as the FSA speaker seemed to think.

Second worrying thought: there is no clear direction of what will happen during transition.

I can appreciate why the FSA may not like to take a position on transition now, but it is unrealistic to expect that the UK operation of an 'investment business' based in another EU country will achieve full compliance with the FSA for a few months whilst they also work to achieve compliance with the requirements of their home regulator. What about a period of grace where the FSA will expect compliance with a 'common core' and with what they will demand later as 'host' regulator ?

That would be the sensible way to avoid the impending train wreck, but that requires a level of co-ordination amongst regulator that I find hard to believe will happen and even if it does happen there will still be a large potential for conflicts, in other words the regulators are asking companies to stand on very thin and unsettled grounds, not a good thing.

But passporting in and out is not the only issue with transition. What about large trades executed in several lots across the October/November divide ? How will these be managed ? (In other words don't do them !). What about companies that have outsourced critical processes and did not keep the internal know how to monitor them (or take over if there are issues) ? And the list could go on and on.

So... 190 days to go and very few people are talking about pragmatic boring and practical issues. The impression I got from listening to two presentations (FSA and REUTERS) and a panel discussion is that there is very little appreciation of some of the strategic implications of MiFID (and business models will have to be changed in the post MiFID world) and even less awareness of some of the ripple effects of MiFID.

Some semantics will change, in most of the EU a 'regulated market' will not be the only place to trade instruments (in the UK concentration disappeared a while ago, but in most of the EU it did not); outsourcing contracts will have to be reviewed and relationships with agents will be different.

Little debate about those issues though, even less debate on the practicalities of looking at multiple trading venues when there is no such a thing (e.g. commodity markets, derivatives, etc. are often traded in one exchange only)

If silence means that everybody is getting on with it, why so many institutions in the UK still have to take action ? Well... I am an optimist and November 1st is getting close.

230 days to the first of November, 2007.

23o days to November 1st, and that includes weekends, bank holidays, summer holidays, etc. I wonder why nobody is in a hurry ?

P J Di Giammarino of the leading city technology think tank JWG IT (see their website at http://www.jwg-it.eu and download their roadmap to implementation document) compares the current situation to the early stages of a tsunami, when the sea 'withdraws' from the beach before the gigantic wave hits the shores with devastating effects.

The FSA has already sent out several strong messages that they will tolerate 'delays' but not lack of compliance. In other words, you need to have a MiFID implementation plan and provide supportive evidence that you are following it (rather than something that was put together at the last minute to prepare for a 'conversation' with the FSA).

In a couple of years, once the whole of the EU will be MiFID compliant the financial world will be different. MiFID changes go beyond a new trading report. Some of the most interesting changes will be :

1) Organisation, there are specific requirements as to where the head of Compliance has to be in an organisation chart; also, how many company have a 'risk mitigation' role?

2) Multiple trading venues. This will change the way you source market data and how you present them to the front office. MTFs (Multiple Trading Facilities) will increase in the near future, some larger institution may even create a role that monitors the market and looks into expanding the number of trading venues and how best execution policy will change to accomodate new trading venues.

3) Client classification. This could almost be done by an external agent, a lot of the criteria are attributes of the client rather than the relationship between client and financial company (e.g. information derived from the balance sheet). Whilst it is conceivable that a client may 'opt up' from retail status with some institutions and not with others, the starting point will be the same. If that is true for different institutions, it is even more true for different departments within the same institution. An interesting benefit of this will be a faster on boarding process of a client that already has some business relationship with the company. If any advisory service is provided to a client, the classification is also very important for 'suitability and accountability purposes' and will definitely influence best execution for that specific client.

4) Outsourced services. Some things in the relationship between provider of outsourced services and the client will have to change, it will not be enough to provide results. The client should be able to monitor how these services are performed. (It could be argued that if you outsource back office, your best execution policy will also affect the company that provides your back office service)

5) Expanded scope. Hedge fund, commodity brokers, investment research companies and others will have to comply with MiFID even if they may have been outside the scope of the Investment Service Directive. This will affect the way they operate and the way they structure their companies.

6) Regulators. At the moment, every company operating in London (for instance) is registered and regulated by the FSA. Once all the jurisdisctions are MiFID compliants and all the financial institutions will be passported, a trader moving from Deutsche Bank in London (which will have the German regulator as the 'home regulator') to Ing-Barings in London (a company that will be regulated by the Dutch regulator) will actually change regulator and may change some of the rules. This implies a continuous training programme for new hires and will create interesting consequences in the recruitment market.

And there is more. All these changes will take longer to implement than righting the code for the new trading report. Changing policies, organisations, and overall processes takes longer than changing code.

So... 230 days to November 1st. Are you still mesmerised by the sea 'withdrawing from the beach' or have you started running ?

Are you pulling up your SOX on MiFID ?

Once a company is MiFID compliant, they will be able to operate throughout the European Economic Area (EU plus Switzerland, Norway, Iceland, Liechtenstein, etc.) with one main regulator (**). The intention of the EU commission was to stimulate and facilitate the creation of a single market for financial services.

Meanwhile on the other side of the Atlantic there is a very large single market for financial product, the US of A. Companies operating in that market have to comply with Sarbanes Oxley regulations (SOX), this applies to all companies operating in the US irrespective of where their headquarter is based.

Therefore both US companies operating in Europe and European companies with an interest in the US have to look at the interaction between MiFID and SOX, since they will have to comply with both.

A quick look at Sarbanes Oxley highlightes two areas of 'joint compliance' plus the audit trail and the storage of information.

Both regulations have conflict of interests rules. They are not aimed at the same thing but they have to live happily together, this is more work for the legal eagles.

Investment Research is another common area, Sarbanes Oxley title V "Analyst conflicts of interest" needs to be considered when looking at Investment Research under MiFID and may ultimately have an impact in the 'suitability and accountability' section of MiFID.

MiFID impacts the audit trail and therefore implies making sure that any changes to it wll not have a negative impact on SOX compliance

MiFID has its own requirements to store information, although there is no indication of potential conflicts with long term storage requirements under SOX one should check before implementation starts.

Overall, this is just something else to consider on your way to MiFID implementation. By the way, if you are within the jurisdiction of the FSA you have less than 8 months !

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(**) This of course implies overall compliance with MiFID. There are only few jurisdictions within the EU that have met the first deadline for the translation of EU directives in their jurisdiction.

Are we missing the point ?

I had several conversation about MiFID with compliance people in the past few weeks and I sometimes wonder why the experts are the only ones who seem to be alarmed that there are only 167 working days to November 1st. A lot of compliance people still have a wait and see attitude.

Do they know anything I don't ?

MiFID compliance is predominantly procedural rather than creating reports and algorythms, changing the way people work takes longer than changing software. Yes, there a lot things that are still uncomfortably vague but some concepts are quite clear and need to be addressed in a way that is appropriate for the organisation, for the specific financial instrument and for the specific client.

For instance the concepts of suitable and appropriate advice may still not be exactly crystal clear but they do depend on the classification of the client and the specific financial instrument. You may need legal advice after you have defined your criteria behind suitability and appropriateness but you have to define the policy first.

Another example is the concept of best execution. We now know that is more than best value, but we also know that the whole policy will be linked with the trading venue chosen and therefore the availability of information provided by this trading venue. Therefore the little we have established so far is already tied to two things : a reasonable effort in working with more than one trading venue, sourcing and distributing the relevant market data and establishing policies and procedures to select among trading venues. Yes some part of 'best execution according to MiFID' are still not clear, but there is work to be done whilst the high level concepts and the big picture is being discussed.

On top of that both examples will create changes in the corporate reference data, those changes may affect all the IT systems used by the company.

A lot of small and medium sized institutions are not in a hurry. 167 working days does not look like a long time to prepare for what might as well be considered Big Bang 2.

There is more to achieving MiFID compliance than writing a compliance manual

Achieving MiFID compliance is an interesting process. Contrary to other regulations (e.g. Capital Adequacy - Basel II) the majority of the work is not 'algorithmic' but procedural. Also, every section of MiFID compliance seems to affect operations, systems and internal controls throughout the whole institution.

Here are a two main examples

MiFID introduces some major conceptual changes in operations and these changes will require changes in attitude, behaviour and policies; a change that is far more difficult to implement than new reporting and/or changes in IT.

Client classification.
The criteria are different and the mapping is not 1-1 with the old categories. Some client will change (higher threshold) and the opt out rules are different. What is very different though is that there is a common basic criteria of classification throughout Europe, the client will be classified in the same way by all the operators in the market. Unless they opt to give up some protection with financial institution A but not with financial institution B (highly unlikely). What is more important is the need to involve clients in this process, inform them of their status, disclose best execution policy (see below) and get their proactive approval to those policies. Classification will have an impact on the execution policies and procedures and will ultimately affect the audit trail (which by the way if the institution has links with the USA and therefore is subject to Sarbanes-Oxley will require some fine tuning and checks to make sure that MiFID compliance does not throw SOX compliance out of the proverbial window).
This may also impact reference data and require changes in all the Client related software systems.

Best execution
First of all the seminal change is that best execution will not be just best value, but will be extended to highest likelihood of achieving a positive end of the trade (e.g. settlement, payment, etc.). If the trade is not with a recognised exchange or with a MTF this may require collecting some more information on the counterparty (e.g. if said counterparty fails an AML check there will be no trade), of course reasonability will prevail but you get the idea.
Multeplicity of trading venues (and the possibility of bypassing stock exchanges completely) represent the second big change, best execution policy will have to list the venue(s) normally used to execute an order for that specific financial instrument and the criteria behind the choice within those venues. I somehow assume that the majority of institution will introduce multiple venues slowly but ultimately they will (the FSA clearly mentions reasonable criteria for this). Transparency of trade requires a level of disclosure that will push them in that direction.
Best execution policy and processes must be proactively approved by clients and revised regularly, the clients need to be informed of those revision and approve them. One interpretation of the rule is that OTC instruments need to have their own best execution policy that needs be approved by the client each time, given that OTCs are by their very nature unique and tailor made.
These changes (if any) are primarily procedural, changes in procedures will drive changes in IT, relationship with supplier of market data and changes in the audit trail

These two are probably the most difficult changes to make for those institutions that were not included in the FSD and are now included in MiFID (e.g. commodity traders and a number of hedge funds).

What is even more interesting is the changes required in the Organisation Chart. There is more emphasis on the 'functional independence' of compliance and risk control and outsourcing arrangements will have to be reviewed to make sure that they meet the relevant requirements. Companies will have to make relevant adjustments to business continuity policies; risk assessment, management and mitigation policies; internal audit and administrative and accounting procedures.

All those changes will have an effect on the Operational Risk Profile of the company and therefore may temporarily impact Capital Adequacy (according to Basel II principles)

And yes... there are changes in transaction reporting as well.

All of this has to be achieved by November 1st (less than 180 working days away). Implementing Capital Adequacy criteria was faster, operationally less complex and had more time to achieve full compliance.

Let's be practical - First step towards compliance

Several websites have a sort of MiFID countdown. There are 252 days to November 1st, and that includes weekends, holidays, etc. Not a long time isn't it ?


So what do you do if you have not started yet ?


First of all do not sit hoping to find some pre-packaged, pre-prepared standard implementation solution. You may possibly solve the IT side of MiFID in this way but that would not solve the policies and procedures side and what's more there still be the need to integrate the rest of your IT system. You need to act and act now, so where do you start ?


The first thing to do is assess the impact of MiFID for your organisation.


Look at your organisation chart, look at what you do (traded product, advisory services, research advice, relationship to clients, etc.) and most of all look at what else will be indirectly affected by the changes brought in to become MiFID compliant. Areas likely to be affected are market data, reference data, audit trail, client reporting, financial reporting and you also will need to review all the literature you distribute to clients and the relevant contractual documentation (from standard terms and conditions to clients agreement, etc.). Bear in mind that best execution means more than best value and that you will have the possibility of using more than one trading venue. Last but not least consider your other regulatory requirements, MiFID is not going to exist in isolation. Bear in mind that during the transition to full compliance and for some time after that your Operational Risk will increase and that will affect Basel II, also MiFID will have an impact on your audit trail and therefore if you have to be Sarbanes-Oxley compliant you have to look at that as well. Also MiFID has introduced changes in the Conduct of Business rules, make sure you have considered those changes as wel


Second - Gap Analysis

You have your scope, you have the list of policies and procedures to define or revise, you know what you have to do with IT. You now need to define what you have to do to get there and also what are the dependencies and how many work streams you need to create.

Third - Classify your client, define your best execution policy and make sure you have a proactive agreements from your clients, define your other new policies and procedures

Fourth Run two parallel (but co-ordinated) projects - IT and new policies and procedures. This is really important. If you read this from the UK you need to make sure that your policies and procedures are implemented by everybody in your organisation.


Make sure you have expert advice at hand, you will need legal advice in your communication with clients and supplier and whenever there is the need to interpret vague points in the directive. Your new audit trail also needs to be reviewed by an expert especially if you have to be SOX compliance as well.

This has probably not helped very much, but there are only about 180 working days to go. Do not think that MiFID is just for equity, if you deal in any of the following (and this is a summarised list) you have to be MiFID compliant:

transferable securities, money market instruments, units in collective investment undertakings, options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies interest rates or yields, derivative instruments for the transfer of credit risk, financial contract for differences [N.B. This list is not exhaustive]

Last January 65% of compliance officer questioned in the City thought that MiFID only affected institutions that deal in equity, that is obviously wrong. With about 180 working days to go to November 1st the time for action is now. Unfortunately a lot of smaller companies are in wait and see mode, how do you think we can better educate our peers ?

MiFID and Passporting: reality, dream or nightmare ?

Charles McCreevy - EU internal market commissioner - has doubts about the implementation of the 'dream' of a single Europe-wide rule book. Are those doubts justified ?

Speaking at a City event organised by UK Treasury, he admitted that translation of 27 regulators with different level of gold plating of the EU rules will not create a single rule book. On the other hand, looking at the content of the directive, does it really matter ?

The concept of a single market for financial services predates MiFID. The idea of being licenced to operate within the EU (actually within the EEA, i.e. EU plus Switzerland, Norway and Iceland) simply by being supervised by one regulator existed already, except the vague definition of the division of competence between the 'home' regulator and the 'host' regulator allowed some countries to make life very difficult for EU based financial institutions that wanted to enter their market.

MiFID was meant to put a stop to that, clarifying the competences between the two regulators. So does it really matter if the gold plating of local bureaucrats (one of their favourite pastime) creates 27 different rule books ?

In principle, a single rule book is very important, but it is less important than a clarity in the division of competence. What stops the single market in financial services is not different rules for different jurisdictions, it is the invisible - and visible - barriers that a regulator can (until Nov. 1st, 2007) put up to make life difficult for a company that wants to open an office in the jurisdiction.

However the blame for this lack of clarity must be shared with all market partecipants, there are (21/02/2007) 8 months and five working days to full implementation and a lot of market participants have failed to wake up to the practical and operational aspects of MiFID. There are a lot of people out there who have not completely grasped the practical consequences of the possibility of using multiple venue to trade financial instruments and there is a generic lack of urgency amongst companies that were outside the rule book and now have to become MiFID compliant. (Astonishingly, 65% of compliance officer questioned in London a month ago still thought that MiFID only affected equity trading)

Level One and Level Two implementation of MiFID are still vague, those affected do not seem to have made enough noise about achieving clarity. Lack of clarity on one side and lack of leadership on the other side are far more dangerous (and therefore a far worse nightmare) than 27 different rule books.

A few myths about MiFID

MiFID has a way of impacting all side of operations: from changing the meaning of best execution to affecting the way a financial institution sources market data; from the concept that process and procedures behind an execution of an order on every financial product traded has to be shared with clients (and ultimately getting their approval) to transparency of trade reports. Companies will have to create process and procedures, review them on a regular basis and prove to clients and to the regulators that these procedures are followed.

MiFID expands the coverage of the old Financial Service Directive, that means that a whole new group of companies (e.g. commodity traders) that were outside the FSD are now included in MiFID

A lot of experts have discussed MiFID; law firms, experts, professionals have all discussed the big principle behind MiFID. Very few have discussed practicalities and the implication of becoming MiFID compliant; probably because the final Instruments were published by the FSA only a few weeks ago. In the meantime a few myths and a few dangerous claims have appeared in financial markets around Europe.

Myth number 1: Best execution in MiFID only refers to equity. In a survey of compliance officers of London based brokers, hedge funds and commodity traders, over 60% have implied that MiFID does not really affect them because they do not trade in equity. Well, Annex 1, section C of MiFID lists the financial instruments under MiFID[1] and they cover far more than equity. Now, within the boundary of reasonability, each instrument traded needs a best execution policy that has to be regularly updated and shared with clients. It could be argued that there must be policies for retail clients and policies for professional clients. OTC products do not escape that completely, since they are unique and taylor made they may require agreement with the client as far as execution policy is concerned. Now best execution under MiFID means more than just best value, it also means lowest costs, likelihood of execution and settlement, and any other relevant factor that may influence the execution of the order. Financial instrument traded in regulated markets and or in Multi-lateral Trading Facilities (MTF) will require listing venues regularly used and why and that list will have to be regularly updated (and shared with clients).

Myth number 2: Clients will have to be classified in each instrument, this is partly correct but in practical terms it will be far simpler for a company, especially smaller institutions, to reach a common classification for clients.

Myth number 3: bolt-on solutions. A lot of MiFID compliance requirements involve process and procedures. In many ways, these represent some of the features that allow a business to differentiate from the competition. The FSA in his translation of the EU rules has increased the emphasis of process and procedure; unfortunately this negates a standard, good for all solution. Some part of MiFID could be standardised;on the other hand, trade reports are strictly related to processes and procedures that define best execution. MiFID will also have to live side by side with existing regulatory requirement. That will have an impact on reference data, how market data are sourced and used within the companies, all the trading software, and a lot more within a company.

Myth number 4: Client classification is straightforward. On one hand, it is true. On the other hand, MiFID allows trading outside regulated markets, therefore an institution may conceivably find itself executing both sides of the trade. For this reason a conflict of interest policy has to be in place and… of course, shared with the client.

MiFID is not all pain. MiFID will make it easier to operate in other EEA markets, it defines the relationship between the ‘home’ regulator and the ‘host’ regulator. This is a huge contribution to the single market for financial services. MiFID will also allow institution to trade beyond the obvious regulated market in their jurisdiction, it opens up the competition between exchanges, it creates the role of Multi-lateral Trading Facilities (MTF) and ultimately will bring down the cost of trading. Exchanges (from stock exchanges to derivative markets, from commodities exchanges to FX exchanges) will loose the ability to exclusively influence the value of the financial instrument traded.

MiFID has been compared to Big Bang 2. There is too much to gain by London as a financial centre for the FSA to become flexible on November 1^st. The time for practical action is now. There is little time to wait. Being compliant with MiFID will not be particularly onerous, becoming compliant will not be cheap, quick or easy.

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[1] The products listed include: transferable securities, money market instruments, units in collective investment undertakings, options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies interest rates or yields, derivative instruments for the transfer of credit risk, financial contract for differences, etc. etc. etc.