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MiFID I Lessons Learnt and Looking Ahead

By Andrew Bowley, Chris Pickles
MiFID I has undoubtedly made its impact on the industry. FIXGlobal collates opinion from Nomura’s Andrew Bowley and BT Global Service’s Chris Pickles on the success of MiFID and its next manifestation.

Having digested the massive changes MIFID brought to the EU two years ago, what has the financial community learnt from the content of MIFID 1 and the process whereby it was developed and implemented?
Andrew Bowley (Nomura):
First and foremost we must conclude that MiFID has worked. We now have genuine competition and higher transparency across Europe.

Costs are down. MTFs (Multilateral Trading Facilities) have brought in cheaper trading rates and simpler cost structures, and most exchanges have followed with substantial fee cuts of their own. Indeed this pattern is also clearly demonstrated by exception. The one country where MiFID has not been properly introduced is Spain and this is one country where fees have effectively been increased. This teaches us that complete implementation is the key and the European Commission needs to look hard at such exceptions.
We have also seen clearing rates reduced, though the fragmentation itself has caused clearing charges to increase as a proportion of trading fees as typically the clearers charge per execution. Interoperability should help address that, assuming a positive outcome of the current regulatory review.
In terms of lessons learnt from the process we must consider that we have experienced a dramatic change in a short period of time, and should allow more time for the market to adjust before fully concluding or looking to further wholesale change. We are certainly still in a period of transition – new MTFs are still launching; and the commercial models of all of these, mean that we are far from the final equilibrium. To have so many loss-making MTFs means that we cannot be considered to be operating in a stable sustainable environment.
Chris Pickles (BT Global Services):
MiFID is a principles-based directive: it doesn’t aim to give detail, but to establish the principles that should be incorporated in national legislation and that should be followed by investment firms (both buy-side and sell-side). Some market participants may have felt that this approach allowed more flexibility, while others wanted to see specific rules for every possible occasion. The European Commission has perhaps taken the best approach by allowing investment firms and regulators to establish themselves what are the best ways of complying with the MiFID principles, and has perhaps “turned the tables” on the professionals. If the European Commission had tried to tell the professionals how to do their job, the industry would have been up in arms. Instead, MiFID says what has to be achieved – best execution. Leaving the details of how to achieve this to the industry means that the industry has to work out how to achieve that result. This takes time, effort and discussion. FIX Protocol Ltd. helped to drive that discussion by jointly creating the “MiFID Joint Working Group” in 2004. And the discussion is still continuing. A key thing that the industry has learned – and continues to learn – is to ask “why”. Huge assumptions existed before MiFID that are now being questioned or proven to be wrong. On-exchange trading doesn’t always produce the best price. Liquidity does not necessarily stick to existing 100% execution venues. Transparency is not sufficient by just looking at on-exchange prices. And the customer is not necessarily receiving “best execution” from today’s execution policy.

A European Commission spokesperson says a review of MiFID is likely in 2010, so what can the financial community feed into this review to make MiFID 2 a better version of its predecessor?
Chris Pickles ( BT Global Services):
The European Commission has always intended the implementation of MiFID to be a multi-stage process – using the Lamfalussy Process – and a review has always been planned to see how effectively MiFID has achieved its goals and what tuning measures are still needed. Key points that the industry can raise during this review process are:

  • Requiring the use of industry standards by regulators for reporting by the industry to those regulators. Though regulators monitor the industry, they are also part of the industry’s infrastructure and can help the cost-efficiency and compliance of the industry by using standards that the industry itself uses. This would include the use of standards like the FIX Protocol for trade reporting and transaction reporting.
  • Requiring the use of industry standards by investment firms to meet their MiFID transparency obligations. For example, using the FIX Protocol would allow investment firms to publish their own data in a format that is easy for all to integrate into their own systems. This could help to address the issues around the need for consolidated data across the EU. Execution venues also need to understand that continuing to use their own proprietary protocols is adding unnecessarily to the costs of the industry, whether for trading or for market data distribution.

Andrew Bowley (Nomura):
It is crucial that the financial community contributes to this review and the European Community is very keen for that too. On a recent AFME (Association for Financial Markets in Europe) LIBA (London Investment Banking Association) trip to Brussels those of us present were encouraged to return with written proposals where detail or refinement is needed – specifically on the consolidated tape for instance.

The “consolidated tape” debate is one that is not focussed enough today, and is a great example of where we can provide clear input. Nomura intends to be at the heart of this discussion.
It is also vital that the community makes data available to the policy groups. There are still voices suggesting that costs have risen, which is not the case. Data is essential to demonstrating the effects that MiFID has created.
Equally there is debate around the size of broker dark pools, which will be greatly enhanced via clarity on the real trading activity. We should be debating point of policy, not points of fact.

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