dublin97

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MiFID Presentation for Securities Investment
Institute
1 November 2007
Christopher Bond MSI Senior Adviser
www.sii.org.uk
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MiFID
Part 1 A Retrospective View
Part 2 Some Work-in-progress
Part 3 Possible Economic Consequences
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MiFID
Part 1 A Retrospective View
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The QuestionHow Big is MiFID?

• The Financial Services and Markets Act 2000
  (N2) and largely new rules?
• The Financial Services Act 1986 and LSE ownership
  changes (The Big Bang)?
• The Closing of the LSE Floor and market maker
  screen dealing?
• The Consolidation of Exchanges including NYSE
  Euroclear?
• The rise of Hedge Funds and Private Equity?

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Looking back...

• 27 Countries have created a single EU Market for
  investments
• Similar Conduct of Business Rules in all
  countries
• Exchanges have lost their monopoly and new
  trading markets will emerge
• After sticky start, many larger financial
  companies have accepted and largely welcomed the
  changes
• FSA has introduced More Principles-based
  Regulation and T and C changes at the same time.

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But...

• Many EU countries will be late implementing.
• Some Countries and many smaller firms are
  unprepared for the changes
• Wholesale business is more regulated
• Its been very costly (in money and sleep)
• Doubts remain about increase in procedures and
  record-keeping
• Some new electronic markets are starting slowly
• Will other EEA countries apply MiFID in practice?

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MiFID
Part 2 - Some Work-in-Progress
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Looking Forward...(The EU Dimension)

• Will the FSA expect firms to be ready on 1
  November?
• What happens with late-implementing countries?
• Whose Conduct of Business Rules apply to Branches
  services in third countries?
• Transaction Reporting Unknowns.

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Looking Forward...(The UK Dimension)

• Best Execution (illiquid instruments/training/cons
  ent to OTC Dealing/scope of policy)
• Categorization of Buy-side by Sell-side Firms
• New Inducements Rule (providers and
  distributors/disclosures/introducers)
• Client litigation
• Managing conflicts of interest
• And not forgetting corporate governance...

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MiFID
Part 3 - Economic Impact
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So how will MiFID change the Markets?

• New style markets( Multilateral Trading
  Facilities and Systematic
• Internalizers) put on equal footing to
  traditional exchanges
• Emergence of new liquidity pools (Project
  Turquoise, Chi-x etc)
• McCreevys drive to reduce cross-border trading
  costs
• New transaction reporting competition (LSE and
  Project BOAT)
• Link to ECBs eurosecurities settlements system
  initiative (SEPA)
• Link to EU Commissions Review of distribution
  of UCITS and alternative
• funds
• Exchange consolidation and separation of
  clearing from trading
• BUT...
• how much is due to technology change eg smart
  order routing?

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Markets
Multilateral Trading Facilities and Systematic
Internalisers
The end of the Concentration Rule
Exchanges
Publication of Pre-Trade and Post-Trade equity
prices
Separation from Transaction reporting (and sale
of data)
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Markets - Example

• Yesterday
• There is a Client Order for a UK equity
• Currently main markets are LSE and Plus Markets
• The firm can choose which to use
• Today
• The firms Execution Policy will review these
  markets and electronic order matching systems
  e.g. Chi-x, and, if traded outside UK, at other
  exchanges and markets

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So how can Firms adapt their Business Strategies?

• Start/Increase cross-border services
• Move/Focus on areas of strength e.g.
  execution-only ? Advisory Services ?
  Discretionary Management
• Become a market maker or MTF
• Sell your price data
• Use regulatory arbitrage eg categorization of
  clients

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So how can Firms adapt their Business Strategies?
(Reduce Costs)

• Commoditize international products
• Become a market maker, systematic internalizer or
  Multilateral Trading Facility
• Join a network to share costs, or even merge?

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The Challenge and Opportunity of MiFID
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And the next big things?

• ICAAP under Pillar 2
• Disclosures under Pillar 3
• The Retail Distribution Review