MiFID Presentation for Securities & Investment Institute Christopher Bond MSI Senior Adviser 1 November 2007

Part 1 – A Retrospective View Part 3 – Possible Economic Consequences Part 2 – Some Work-in-progress MiFID

Part 1 – A Retrospective View MiFID

The Question How 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?

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.

But...  Many EU countries will be late implementing.  Some Countries and many smaller firms are unprepared for the changes  Wholesale business is more regulated  It’s 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?

Part 2 - Some Work-in-Progress MiFID

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.

 Best Execution (illiquid instruments/training/consent 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... Looking Forward... (The UK Dimension)

MiFID Part 3 - Economic Impact

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)  McCreevy’s drive to reduce cross-border trading costs  New transaction reporting competition (LSE and Project BOAT)  Link to ECB’s eurosecurities settlements system initiative (SEPA)  Link to EU Commission’s 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?

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

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 firm’s 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

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

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?

The Challenge and Opportunity of MiFID The clear cost of implementation of MiFID will only prove justified if firms take the opportunities generated to raise revenues. John Tiner, Chief Executive of the FSA - May 2007““

And the next big things?  ICAAP under Pillar 2  Disclosures under Pillar 3  The Retail Distribution Review