Tuesday 3 July 2007

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)!


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