PAN-EU MIFID SURVEY HIGHLIGHTS EUROPE IS ‘READY TO TRADE’, BUT WITH MIXED VIEWS ON LIKELY IMPACTS

Exchanges, banks, fund managers and brokers are on track to implement MiFID
Stock exchanges see MiFID as a business opportunity. Banks, fund managers and brokers see MiFID as another compliance issue
Organisations are spending as much as up to 25% of their total IT/Business change budgets on implementing MiFID
MIFID winners will be: exchanges that are pan-European trading venues, large Europe-wide players, niche players who go for early compliance, end retail investors, European pension funds
MiFID losers will be: High latency domestic exchanges including the London Stock Exchange, domestic exchanges where liquidity is low, smaller financial institutions if they don’t collaborate to reduce the costs of MiFID

MiFID (Markets in Financial Services Directive), the replacement Directive for the Investment Services Directive, is due to come into force in November 2007 with the aim of bringing harmonisation to European security markets, drive consistency in regulation, but not reduce competitive market forces.

A new survey conducted in May and June by Financial Services Operations Management Consultants oee and Cosonovo, Change Management and Strategic Consultants, and targeting virtually every type of financial services organisation that is involved in Capital Markets, has revealed some major differences on the approach being taken to the implementation of MiFID. Stark opinions were also recorded on MiFID’s likely impacts on the market and who will be the likely winners and losers.

The oee/Cosonovo survey targeted organisations across the EU including: stock exchanges, regulators, banks, brokers, and investment managers. The key results were:

With MiFID due to come into force in November 2007, all respondents said that they were on schedule and are into the implementation phase.
In general the stock exchanges see MiFID as a business opportunity, while banks, fund managers and brokers see MiFID primarily as a compliance issue involving re-engineering of business processes.
The majority of organisations impacted expect to spend as much as up to 25% of their total IT/Business change budgets this year on implementing MiFID. The majority feel that costs will be balanced by benefits. However, those that see MiFID as a compliance issue feel that costs will not be balanced at all by the benefits.
Recognising the wholesale changes that MiFID is driving, responses highlighted that MiFID is impacting on just about every area of business operations. Its impact was likened by some to the impacts of ‘Big Bang’ (In a UK sense) and the adoption of the Euro in wholesale markets.
Depending on the view taken on whether MiFID is a business issue or merely a compliance issue, a range of views were expressed on the biggest challenges with respect to its implementation. The exchanges talk about major strategic and cultural changes, whilst the banks, investment managers and brokers are more focused on achieving compliance and the necessary operational changes underpinning this.
With respect to trading issues, the majority see the MiFID obligations around ‘best execution’ as a trading opportunity owing to the belief that offering the most flexible best possible result service will deliver a competitive advantage; one that would be attractive to clients.
Most respondents expect MIFID to impact positively on their home country’s trading ability as, without MiFID, moving liquidity from current domestic exchanges is substantially more difficult. At the same time, countries with more sophisticated markets that have transposed MiFID at an early stage are expected to gain advantage. The City of London’s overall position is expected to be strengthened.
The overall winners from MiFID are expected to be:
- Stock Exchanges, and in particular pan-European trading venues
- Large Europe-wide players
- Niche players who go for early compliance
- Buy side participants
- The end retail investor in the longer term as trading costs come down through increased competition
- European pension funds as greater access to funds and portfolios emerges in newer markets and improved stability is achieved
- Systematic Internalisers
Interestingly the trading venues and market participants that have the most to lose from MiFID include:
- High latency domestic exchanges including the London Stock Exchange
- Domestic exchanges where only a small number of stocks are considered as liquid
- Smaller financial institutions if they don’t collaborate to reduce the costs of
MiFID implementation
- Small unsophisticated/domestic sell side firms

John Barber, Director at oee, said: “This survey highlights the scale of MiFID in that it impacts just about every area of business operations for virtually every financial services organisation that is involved in European Capital Markets. The costs are immense, up to 25% of the total IT/Business change budget for most organisations.

“Regardless of whether organisations see MIFID as a business opportunity or merely a compliance issue, the impacts and challenges are significant, with impacts on business strategy, operations, and organisational culture. However, there is an opportunity for organisations to use MIFID as a stimulus to make far-reaching process and operational improvements across the business as a natural addition to the changes needed to achieve compliance. Processes can be optimised and waste reduced to deliver cost benefits that will help offset the

costs of MIFID compliance. Some major financial services companies have achieved savings of up to 30% by applying the principles of Lean Service to their operations without major capital investment.”

“MiFID is a major change management issue and it will be interesting to see who really wins out of this. The survey suggests that a potentially more short-term defensive/compliance type approach is being taken by some which may be to their longer-term detriment. Our survey suggests that the more proactive, early adopters, and those that structure their business successfully to benefit from the opening up of markets across Europe will benefit the most. Established players, including the traditional domestic institutions, may be vulnerable to the sweeping changes that MiFID will drive.”

Andrew Simpson, Director at Cosonovo, said: “The survey clearly indicates that the exchanges are positioning themselves to benefit from the opportunities of MiFID and this, as well as current industry activity, indicates that we will see a significant change in market structure post November 1st. At present the Tier 1 investment banks are looking to simply comply with the Regulation and the associated Directive, but once the execution venues have completed their round of consolidation we should expect the banks to start driving their competitive solutions – those that don’t are likely to lose out. In addition, the competition we see now from venues is likely to lead to further M&A activity in the coming 18 months.

“It would appear that the main area of focus for competitive positioning is through the development of pan-European services and also through Best Execution. Those firms that are slow to develop market leading Best Execution services will lose out as liquidity and order flow ebb away. Increasingly, latency will become

a tremendously important component in delivering any best result.

“So, what we see from the survey results is significant IT spend in all parts of the industry, a focus on competition from the venues, but compliance from the firms. It is likely that once the sell-side have delivered their compliance solutions they will shortly afterwards have to deliver competitive Best Execution solutions in order to maintain their position or increase market share. The cost to comply is only the

starting point and we can anticipate further industry IT spend related to MiFID for the next 2-3 years at least.”

Martin Russell, Market commentator and Course Director of the FT's 'Introducing the City' programme, said: "oee/Cosonovo's survey has canvassed opinion from a diverse and reputable group of international parties that includes service providers, liquidity providers and wholesale end users. Early fears about the complexities associated with the implementation of MiFID have, in the majority of cases, been allayed - despite some protracted and unhelpful delays in the interpretation of the Directive into domestic laws.

“The firms and organisations that are quick to grasp and interpret the information that is required to be gathered will soon perceive commercial opportunities and economic advantages. For example in the cost of insurance cover, which can go some way to offset the significant costs of implementation. In some cases, the

costs incurred may well accelerate mergers or other consolidation among smaller or less sophisticated players so that value can be achieved out of this exercise. It is noteworthy that the significant impact of costs has fallen heavily on London."