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)!