Don't leave dealing with MiFID Transparency until the last moment
Many banks and other affected financial institutions have focussed their MiFID activities on the most complex areas of MiFID: client classification and best execution. These clearly are likely to have the most profound impact on the way that a financial firm operates today and are therefore deserving of detailed attention, and the implementation and testing of the complex systems required for compliance.
However there is a further area of the MiFID provisions which seems to be getting less attention than it deserves: transparency. As I'm sure I don't have to remind you, while MiFID's best execution provisions apply to all types of financial instruments, transparency will initially apply only to equities, and then only to the MiFID liquid 500 shares. Some of these won't be very liquid, since individual member states can nominate a small number of equities to be regarded as liquid even though they wouldn't actually meet the liquidity guidelines enshrined in MiFID.
Because only equities are initially affected we have seen many firms delegate responsibility for the transparency aspects of MiFID to their equities desk or equities team. This may be unwise since the EU has already published, and received responses for, a call for evidence on the extension of the transparency provisions to include bonds and equity derivatives - for some institutions these instruments represent a far larger proportion of their trading volumes and revenues than equities do. Whatever is put in place for equities will almost certainly need to be extended to other instruments in due course.
 Wherever it's been delegated, it seems that many organisations are either ignoring the transparency provisions of MiFID, or leaving them until the last moment. The level 2 documentation included the lists of fields that must be published in order to comply with the transparency provisions, but it didn't include enough information about the content of each field for anyone to actually start writing programs to manage the publication of transparency information. It's hardly surprising, therefore, that there's a lack of activity. At the time of writing the level 3 documentation had not been published, but when it is, it will hopefully eliminate a lot of the existing ambiguity.
Since contributing MiFID transparency data is a logical addition to Gissing's existing multi-vendor contributions business, we are somewhat concerned that financial firms in the UK may postpone doing anything about MiFID transparency until the last moment. The danger is that they will then be scrambling around in the final few weeks prior to the November 2007 deadline to put something in place. This is unlikely to leave long enough to test the systems properly.
The FSA hasn't helped matters by indicating that they'll be in no position to enforce the provisions of MiFID on the 1st of November. I suspect that has caused some firms to relax, but the FSA have said that when they are capable of doing an audit it will be retrospective; no room for relaxation there then.
The question of where the transparency data is to be made available is still wide open. The members of the MiFID Joint Working Group (JWG) who are working on fleshing out the details of the implementation of MiFID seem to have come to a consensus that there will be a number of MiFID "aggregators" - the precise number has yet to emerge, to which financial firms will contribute their pre- and post-trade MiFID data. Trading firms and retail customers will be able to subscribe to this data in order to see what instruments are being traded and at what prices. The costs of subscription, and whether there will be any cost to contribute, are as yet undetermined.
There is a further consensus that most aggregators will receive and publish MiFID data in FAST (FIX Adapted for STreaming) protocol. We at Gissing Software have successfully implemented the communications protocol ourselves and demonstrated that the claimed 90% compression of data is achievable. However one of the mechanisms by which it achieves this efficiency is by each party to the transmission knowing something about the other party and the type of communication. This means that substantial amounts of the data, normally transmitted as part of each message, can be omitted from the transmission because it can be inferred. But the necessary protocol for the preliminary exchange of templates to establish this "knowledge" is not yet defined.
Transparency, and the publication of data, falls into two areas: pre-trade transparency and post-trade transparency.
Pre-trade transparency affects only Systematic Internalisers (SIs) -basically this includes all firms that trade any of the defined liquid shares on their own account. It appears from a recent JWG special interest group meeting that most firms have decided whether they're going to be an SI for MiFID purposes or not - but none were prepared to reveal what the result of the decision is.
Post-trade transparency requires that all trades in liquid shares are reported. This might not seem to be a major departure from existing requirements where trades in equities are reported to the exchange on which they're traded. However MiFID does stir things up significantly by allowing reporting to any suitable venue (such as one of the aggregators). Since many of these venues are likely to be pan-European, and exchanges make significant revenues by charging for trade reporting, this change is likely to affect the revenues of some of the exchanges.
MiFID also requires that all trades are reported in as near real-time as possible and in any event within three minutes. Subsequent guidance has clarified that three minutes should be treated as an exception rather than a target. This is a major change from current practice which is often end-of-day reporting or even later. In particular off-market and OTC trades will require new systems to be able to capture the trade and report it within the appropriate timescales.
These issues surrounding transparency may have been considered by affected firms. But if they're not addressed soon it may be too late to sort out the necessary changes to processes, and integrate and test the appropriate technology before the November deadline.
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