Company

MiFID

There are many differing opinions on what the impact (and cost) of MiFID will be.
This document is a summary of Gissing’s understanding of MiFID, primarily considering the transparency and best execution requirements.

Revision History:

Initially published 31 March 2006.

Updated to reflect the contents of the Level 2 Guidance published in February 2006.

Revised November 2007 to reflect MiFID having come into force.

Contents

• What is MiFID?
• What are its primary objectives?
• What do we know?
• What do we think is likely?
• Gissing’s MiFID position.

What is MiFID?

MiFID, the Markets in Financial Instruments Directive is a Directive from the European Commission instructing EU member states to enact primary legislation.

What are its primary objectives?

• To improve “passporting”, i.e. the ability of a financial institution based in one EU member state to conduct business in the other member states without requiring regulatory approval in each state
• To improve transaction transparency, particularly to protect retail purchasers of equities.
• To force “systematic internalisers”, i.e. organisations that complete transactions internally rather than on a market, to publish their off-market pre-trade prices and post-trade transaction details.
• To enforce across the EU a consistent system of “best execution”, meaning that clients of trading bodies can expect (and that those bodies create and maintain an audit trail to prove) that they were provided with the best combination of price, service, timeliness and so on.
• To improve competition, including encouraging trading bodies based outside the EU to transact business inside the EU.

What do we know?

• MiFID came into force on 1st November 2007.
• It will eventually come into force in 30 countries (the current EU27 and the three EEA countries: Liechtenstein, Iceland and Norway). At the time of writing (November 2007) several countries had yet to transpose the directive into local legislation.
• The European Commission published their Level 2 documentation in February 2006.
• The transparency aspects of MiFID initially apply to equity trading; they are likely to be extended to other instruments but not until a later date.
• The European Commission is expected to publish their recommendations on extension of transparency to other instruments in March 2008.
• The best execution aspects of MiFID apply to all financial instruments (specifically including foreign exchange).
• MiFID requires “systematic internalisers” to contribute pre-trade quotes for "liquid shares" to one or more data venues in real-time, and to maintain a record of each quote for a minimum of 1 year.
• MiFID requires all financial institutions executing trades in any equity admitted for trading anywhere within the MiFID 30 countries to contribute post-trade data (trade reports) to one or more data venues in as near to real-time as possible, and in any event within three minutes.
• Financial institutions must contribute their data somewhere.
• Contributed data has to be easily consolidated: i.e. contributing data to a simple website, even the bank’s own, will not be acceptable.
• In order to ensure compliance with the best execution provisions of MiFID, trading organisations will need access, both in real-time and historical, to MiFID data from some or all other traders in the same instruments.
• The risk of there being differences in legislative implementation between member states has been substantially reduced by a large proportion of the Level 2 documentation being published as a Regulation rather than a Directive.
• Real-time data contribution is our business! We will provide our clients with the means of connecting their back office systems and market data platforms to the appropriate contribution venue(s).

What do we think is likely?

• Because any organisation from outside the EU that trades inside the EU will be required to comply with the provisions of MiFID, it’s likely that MiFID will be widely implemented by financial services organisations based in Switzerland.
• Banks (and other contributing organisations) are likely to contribute data to multiple venues. The reasons we think this are:
  • For pre-trade quotes: if they’re contributing to comply with MiFID, they might as well use those contributions as at least indicative, and possibly executable, prices. This would combine their MiFID compliance with their normal business.
  • For guaranteed compliance and resilience: MiFID places the onus on the bank to publish data, not on the data venue. If a single venue becomes unavailable, or can’t handle the volume of contributed data, then it’s the bank that will be held responsible for the failure to publish the data; so publishing data to more than one venue reduces the risk of non-compliance.