1. The Markets in Financial Instruments Directive [ MiFID ]
Thursday 1st November 2007
ALAN BURR, FSI

2. The waiting is over …. Efficient markets Competition and choice
Investor protection and improved relationships
Cross-border business
Harmonised rulebooks
Best execution and increased transparency

3. What is the MiFID? Markets in Financial Instruments Directive
Is part of the EU’s Financial Services Action Plan (FSAP)
Essentially a political debate and process
Completely replaces the Investment Services Directive (ISD) of 1993 and extends its coverage to relate to firms’ conduct and internal organisation
To apply from 1st November TODAY!
Applies to all EU / EEA member states
(all they all ready?)
A major challenge to regulators, practitioner firms, exchanges and trading platforms – plus their suppliers
May cost UK institutions £1 billion up-front (FSA)
plus on-going costs and income benefits too

4. EU timetable – key dates
31 January 2007: Transposition date
by which national governments and regulators should have made necessary changes to laws and rules
1 November 2007: Implementation date
requirements of Directive (Level 1) and “technical implementing measures” (Level 2) come into force
ISD is repealed
Many Member States are not ready

5. The wider context and objectives for MiFID
Key developments over ISD:
MiFID extends the existing ISD, by establishing EU wide legislative harmonisation for:
a wider range of financial instruments (for example including both financial and commodity derivatives)
a wider range of investment services including the provision of advice
alternative trading mechanisms and venues (e.g. Multilateral Trading Facilities - MTFs)
in addition the directive is more prescriptive than its predecessors, giving less leeway to individual states when translating the directive into national law and market practice

6. Details and Scope

7. Fundamental impacts 30 EEA countries
Rules made in Brussels – not London!
Passporting
End of the “concentration rule”
RMs, MTFs and SIs
Derivatives
Best execution
Common client classification framework
Pre-trade and post-trade transparency
Conduct of business rules (FSA’s COBS)
Organisational requirements
Outsourcing
Inducements
Agreements, policies and record keeping
Business continuity planning
Transaction reporting

8. What does MiFID cover? Conflicts of interest
Compliance and risk management
Best execution
Transaction reporting
Internal systems
Client assets
Pre-trade and post-trade transparency
Outsourcing
Client classification
Inducements
Communication with clients
Suitability and appropriateness
Derivatives
Client agreements
Investment research
Financial promotion
Information disclosure
Order handling
Execution only services
Record keeping
Cross-border trading
RMs, MTFs and SIs

9. MiFID – expansion of scope
Commodity derivatives
Credit derivatives
Financial contracts for differences
Exotic derivatives
Investment advice
Operating MTFs

10. Key MiFID themes (1) Increased scope coverage: Best execution:
all firms providing investment advice
MTFs
commodity derivatives
Best execution:
obligation to ensure the best possible result for their clients
firms are required to draw up, publish, review and maintain execution policies
level playing field for the retail investor – protection and execution integrity

11. Key MiFID themes (2) Pre-trade transparency: Post-trade transparency:
MiFID establishes minimum standards
Post-trade transparency:
increase in trade reporting obligations, initially in equities
Passporting rights:
improved and simplified operation of a single passport for investment activity
Conflicts of interest:
stipulation to ensure firms have effective systems and controls
demonstration of management of conflicts of interest e.g. Chinese Walls and disclosures

12. Key MiFID themes (3) Conduct of Business (COBS):
extensive changes
full suitability test on clients when providing investment advice or portfolio management
significant changes in client documentation
Investor classification:
common EU framework for classifying counterparties
Retail Clients
Professional Clients
Eligible Counterparties

13. Client classification
Before and after MiFID ….
FSA
MiFID
Private Customer
Intermediate Customer
Market Counterparty
Retail Client
Professional Client
Eligible Counterparty (ECP)

14. Key MiFID themes (4) Outsourcing: Business continuity:
outsourced operational functions must not impair a firm’s internal control or weaken the monitoring of a firm’s compliance obligations
Includes intra group contracts
comprehensive exit strategy required
notification to regulatory authorities
must avoid additional operational risk
Business continuity:
written and tested plans

15. Market Structures

16. Who will MiFID affect? This includes: Retail banks Investment banks
In general MiFID covers most if not all firms previously subject to the ISD, plus some that currently are not.
This includes:
Retail banks
Investment banks
Portfolio managers
Stockbrokers and broker dealers
Corporate finance firms
Many futures and options firms
Some commodity firms
Wholesale market brokers

17. Market impact (1) Main outcomes likely to be:
greater competition between trading platforms
impact of new transparency regime on liquidity and spreads
strengthening of investor confidence through, e.g. access to more comprehensive trading information
greater competition for trading data

18. Market impact (2) Trading platforms:
limited implications for the competition between RMs, as the UK has a relatively open and competitive environment for exchanges
RMs will face competitive threats from MTFs and SIs
MTFs may be able to compete more effectively with other trading venues, as EU-wide access facilitated
allowing investment firms to compete more directly as execution venues will impact those countries with concentration rules
less so for the UK which already has a relatively high degree of internalisation

19. Market impact (3) Pre-trade transparency: Post-trade transparency:
little change for trading on order-book, quote-driven and hybrid systems
on-exchange trading outside these systems will need to become pre-trade transparent (about 15% by volume, 5% by value)
Post-trade transparency:
new block trading regime and requirement to publish non-UK share transactions
Impact on spreads and liquidity may be limited

20. Market impact (4) Main investor confidence provisions are in COBS area
Costs of post-trade reporting will fall
Effective consolidation arrangements should mean cost of data falls in medium term
Some new initiatives ….

21. Project BOAT 9 investment banks
Trade reporting and market data aggregation
Reduce the cost of market data
Leveraging MiFID

22. Project BOAT
June 2007 – 5 more banks announced as joining Project BOAT
BNP Paribas
RBS
Barclays Capital
Dresdner Kleinwort
JP Morgan

23. Project Turquoise 7-9 investment banks Creating a MTF
Appointed a DTCC subsidiary, EuroCCP
Citi to settle trades
Challenging dominance of exchanges
Leveraging MiFID
Live Q2 of 2008?
Cinnober to provide the trading system

24. Equiduct Based on EASDAQ model, Belgium based
Single venue trading (not 29 exchanges)
Speed – ultra fast
Cost - reducing costs for connectivity, trading and clearing and settlement
Likelihood - guaranteed execution
Price - provable pan-European best price
Leveraging MiFID

25. Instinet Chi-X Ltd. Operated by Instinet Europe Limited
Low execution and settlement costs
Passporting into all venues
7,500 pan-European equities
Speed, cost, access ….
Leveraging MiFID
Already successfully operating, trading Dutch and German stocks plus French and British ones too

26. Expect more …. COMPETITION COMPLEXITY CHANGE New ventures MTFs
Tariffs and fees
COMPLEXITY
Smart order routing and algorithmic trading
Dark liquidity pools
CHANGE
Buy-side models
Order flow
Best execution policies

27. Summary – Market Structure
Introduction of MTFs and Systematic Internalisers – public quotes
Transparency for pre-trade limit orders
Rules on order handling
New best execution rules
Collection and dissemination of market information
How to get a complete market overview?
EU electronic networks to be set up
Definition of liquidity for various instruments
Re-definition of financial instruments, incl. derivatives
Definition of Retail Market Size
Published list of Pan-European shares (CESR)

28. Impact upon Firms

29. MiFID – the overall impact on firms
Not just compliance!
Business models
Operations
Technology

30. Areas of firms affected
Most areas!
Compliance
Senior management IT
Legal
Client services
Human resources
Operations
Trade execution
Risk management
Internal audit
Custody
Branch structures
Buy and sell-side

31. Organisational requirements (1)
General organisational requirements :
- governance, internal controls and organisation
- accounting procedure
- audit committee and risk management
- business continuity
- persons controlling the firm
- senior management responsibilities
Employees, agents and other relevant persons (including senior management requirements):
- awareness of procedures
- segregation of duties
- employees’ competence, skills, knowledge and expertise (new T&C regime at same time from FSA)
- ongoing monitoring

32. Organisational requirements (2)
Compliance (including internal audit):
- establish effective systems and procedures to meet regulatory requirements
Risk controls (including certain CRD risk-specific material):
- establish effective risk control policies and procedures
Outsourcing:
- additional requirements
Record keeping:
Conflicts of interest:
- establish and maintain an effective written policy to manage conflicts of interest between the firm and its clients and between clients of the firm

33. Suitability and Appropriateness
Advisers / Managers – “Suitability”
relates to the provision of investment advice
increased information gathering requirements
owed to all clients wherever the firm provides advice or portfolio management services
firms must gather information about knowledge, experience, objectives and financial situation
Other services – “Appropriateness”
execution only
information on client's “knowledge and experience”
to determine whether services / products “appropriate”

34. Keeping records of Suitability
Best to have a policy of keeping records when giving investment advice
Record the advice and why it was suitable
Retain records for 5 years after the transaction has matured

35. Documentation Revise standard terms of business and risk warnings
Produce conflicts management policy
Produce best execution policy with list of execution venues
Review adequacy of documentation of compliance and systems and controls
Publication of unexecuted client limit orders

36. Transaction reporting
Transaction reports play key role in detecting market abuse and protecting market integrity
Under MiFID:
all transactions in instruments admitted to trading on an RM to be reported. UK regime thus will extend to include commodity, interest rate and foreign exchange derivative contracts
reports to be made electronically and contain specified fields
firms may report to their local regulator rather than the regulator of the market
report no later than next business day
maintain records in a "re-constitutable format" for 5 years
Trade Data Monitors
Approved Reporting Mechanisms

37. Summary – Record keeping
Firms must keep records in "sufficient detail" to be able to reconstitute their transactions
New rules on contents of records:
5 year retention period
Content of transaction reports / 23 fields required
Can hold in durable medium
Records must be kept to prove:
customers were adequately communicated to / from during classification
the ongoing suitability and appropriateness to client
the background business dynamics in order to be able to prove that best execution was achieved at the time of the transaction
Record keeping affects all of your business

38. Industry Guidance

39. MiFID Connect
This a grouping of various industry bodies who have come together to look at the implementation issues associated with MiFID in the UK
Formed by ABI, APCIMS, BBA, BSA, FOA, ICMA, IMA, ISDA and LIBA
Practical implementation policy and advice to member firms
Wholesale and retail sectors

40. MiFID Connect – its objectives
To develop a set of guidelines to avoid risk and legal uncertainty
To provide specimen customer-facing documentation
as a benchmark
worked first on “best execution”, “appropriateness”, “suitability”, and “conflicts of interest”
customer classification, transaction reporting, internalisation, and outsourcing followed
To produce a two-part “survival guide” and checklist for members
Part 1 in mid-2006, being a strategy and plan
Part 2 in mid-2007 as a checklist matrix (end of May)
To hold courses, seminars and workshops
To issue releases and updates
To set up a practitioner advisory committee

41. And so, life under MiFID begins ….