Location: London
Author: Toby West
Date: Thursday, July 26, 2007
Risk Center
The results, announced 100 days before the implementation of the directive, are published as part of a year-long MiFID Readiness survey undertaken in four phases between August 2006 and July 2007. The research catalogues changing attitudes towards MiFID and responses from more than 300 financial institutions worldwide, from both the buy-side and sell-side – making it one of the largest scale MiFID surveys undertaken to date.
Many firms are dissatisfied with the assistance they are receiving from national regulators. Half the respondents stated that their national regulators were either “bad” (32 percent) or “very bad” (19 percent) in helping them to get ready for the directive. In the UK, respondents were divided on whether the FSA’s (Financial Services Authority) minimal guidance, principles-based approach to MiFID was a good one – only 54 percent believed that this is “the best approach to prevent regulatory overload”, with the remaining respondents stating that this approach “makes it difficult to understand exactly what requirements the FSA desires, adding to the compliance task”.
The survey shows an overall increase in MiFID readiness – 53 percent of respondents now believe their preparations for the directive are “ahead” or “right-on-track”, compared with just 34 percent in September 2006. However, opinions are still divided on whether MiFID will have a positive impact. The majority (54 percent) of institutions surveyed state that they see MiFID as just “another piece of compliance”. In addition, only 42 percent of respondents believe that MiFID will be good for Europe’s economy in the next 5-10 years, with over a third still undecided.
Bob Fuller, chief executive officer at Equiduct, commented on the results: “While it is good to see that more firms now feel their preparations for MiFID are almost there, it is clear that still too many firms view this as just another compliance issue. MiFID is very much a business issue, and an opportunity for those firms that see it as such. MiFID is likely to be the catalyst for major market changes with significant, perhaps even unintended, consequences over the next few years. Therefore those firms that understand this and make good progress in the next 100 days and beyond will be the firms who are able to compete successfully in a borderless pan-European market.”
Juan Carlos Nieto, head of business development at Rabo Securities, agreed: “MiFID presents opportunities and, for some, considerable threats. The impact of MiFID in five years’ time will probably prove to be far reaching and much greater than what was actually envisaged from the introduction of the new regulations.”
Ensuring and proving best execution (the optimal mix of price, cost, speed and likelihood of execution) remains a challenge for many firms. In September 2006, almost a third of the firms surveyed stated that they would know how to ensure best execution for equities by the end of 2006. With each round of the survey, this timeline has slipped – 50 percent now believe they will not know how to do this until right up to the November 1 deadline. Where once pre- and post-trade statistical analysis of trades were chosen as the processes most likely to be used to ensure best execution, manual review of best execution has now become an increasingly popular method – cited by 58 percent of respondents in July 2007, compared to just 29 percent at the start of the survey.
For both buy-side and sell-side firms, there has been a marked shift in attitudes towards systematic internalisation - where firms execute client orders against their own order book. Between September 2006 and April 2007, the split between those firms seriously considering becoming systematic internalisers and those not was consistently 30-70. In the last 3 months, however, this has changed dramatically to an even 50-50 split. For buy-side firms, 38 percent believed that the most common reason to become a systematic internaliser would be to drive down and control the cost of best execution. On the sell-side, European expansion was the greatest driver.
"Although it is a concern that many firms seem unhappy with the support that they are receiving from regulators, it is positive that others are seizing the opportunity to launch strategic reforms. Buy-side systematic internalisation, enhanced sophistication of best execution support processes, new exchanges and new liquidity pools are a few of the initiatives that are reshaping the European financial services landscape - and making the vision of a single pan-European financial services market a reality,” commented Elias Nechachby, vice president of business development at SunGard’s Asset Arena business.
Recordkeeping is an area where the results show a dramatic improvement in understanding and implementation. In April 2007, following the announcement of the CESR’s (Committee of European Securities Regulators) proposed recordkeeping requirements, two-thirds of respondents indicated that they would either struggle to handle these new requirements, or that they were unable as yet to ascertain the impact of these proposals. Three months on and over half now believe they would be ready to handle them, with only 12 percent now indicating they will struggle. Fifty-six percent of respondents indicated that they now possess the ability to reconstitute each key stage of all trades in a specific stock, for a specific client, between two specific dates three years in the past – and only 14 percent believed this would be a difficult process.
