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.