Often referred to as the ‘biggest change to hit the EU financial services industry’, MIFID (Markets in Financial Instruments Directive) is now certainly starting to make its presence felt – the plethora of industry forums, seminars and other MIFID events are all testament to the level of interest within the European financial services industry. But what is really starting to focus people’s minds is the looming deadline of April 2007, by which time MIFID must be implemented in all 25 EU member states.
Most business support and IT staff, unless they are heavily involved with compliance, will probably have had very little time to attend all of these events, read the briefings, papers and working group discussion papers. So, before we look at what we think is the real impact of MIFID on IT applications for asset managers, let’s take a quick look at what MIFID is all about.
What is MIFID?
MIFID focuses on best execution and pure market transparency for all types of assets across the EU. Exchanges and execution venues, including investment firms, will compete equally, and traded prices from all execution venues must be available publicly to all market participants, including prices on internal orders.
This has an immediate and direct impact on market data vendors who need to extend their sources of data from just exchanges to now include investment houses across the EU. That data also needs to include a unique ID for each instrument – something that doesn’t currently exist with commodities, foreign exchange, money market and OTC derivatives; hence the intense activity of various MIFID working groups relating to reference data.
Front office systems, and in particular, trade execution and quotes need to be enhanced to ensure ‘best execution’ and a current concern is that, in order to prove best execution, a large number of quotes are going to have to be recorded alongside a trade, which is an additional data set to the data traditionally stored for trades, thereby increasing data storage requirements.
Trade reporting applications also need enhancement to ensure that trades on all asset classes are reported correctly – hence the rise of algorithmic trading, a technique previously used by institutional investors but now also in much greater use by private client asset managers. Algorithmic trading breaks up large trades into smaller blocks to limit the impact of those trades at execution venues.
What MIFID has particularly highlighted is a greater need for enterprise applications – it will be absolutely critical to quote, trade and report in line with regulations – and evidentiary trails of these activities are just as important. Service-oriented architectures, event-driven architectures, the use of workflow to encompass the business process and not the systems, the use of business events within these workflows to trigger automated business actions, with full auditing at every step, the need to monitor these processes for breaches of service levels, and the need to anticipate or forecast breaches is going to be crucial.
IT Impact
MIFID is a regulatory change and therefore mandatory and non-discretionary. As the MIFID Joint Working Group has already highlighted – any associated development has to be implemented by 1 May 2007, probably starting in 2006, so budget provision needs to be considered now.
Most large firms and compliance departments are already aware of MIFID, but there is very little awareness or detailed knowledge elsewhere, especially with those areas that are going to be impacted. Large regulatory change inevitably affects more than one area within a firm, these areas need to be identified and included in the project from an early stage.
Am I alone in thinking that an asset management back-office will not suffer a large impact? Account opening and closing, portfolio accounting and asset servicing do not fall directly under MIFID. I do, however, believe that there may be some minor changes around contract notes and trade recording and that most policy changes are going to be incorporated into revised client agreement letters.
Large regulatory projects like MIFID are not new to the EU financial services industry any longer – we have had enough of them, over a long period of time, not to be surprised any longer. The deadline is looming and preparation is key. Are you ready?