Are Europe's Banks Ready for MiFID?

The Markets in Financial Instruments Directive goes into effect Nov. 1, and the new regulations will test investment banks' data storage

With less than one month to go until the MiFID investment banking regulations come into force, it is still unclear how prepared banks are -- and what will happen to those that aren't ready.

MiFID -- the Markets in Financial Instruments Directive -- comes into effect on 1 November and aims to improve the way investment banks do business across Europe. But while some banks are rushing to be ready, others are taking a wait-and-see approach.

The new regulations could have a big impact on the IT systems of investment banks. For example, one key challenge for financial services institutions will be the need to absorb a massive increase in data.

Consultant BearingPoint predicts institutions should expect a fourfold increase in pre-trade data and a doubling of post-trade data, due largely to more frequent price updating and the emergence of new trading venues -- which will also make it more important for investment firms to provide smart order routing.

But Peter Redshaw, research director at analyst Gartner, said it is likely to take financial institutions a while to work out their new processes and arrive at "optimum compliance".

Redshaw also predicted that the Financial Services Authority (FSA) might be lenient on those banks not fully compliant for up to 18 months, as the implications of MiFID slowly become clear.

He said: "I don't think they would suddenly find the FSA dragging them in front of tribunals and courts or fining them, but they shouldn't be complacent."

But Redshaw added: "For those on the buy side, especially the smaller players, I think we'll probably see a frantic rush to be ready."

And despite it being likely the FSA will be lenient, there are benefits of being ready on time, he said. "There's a chance to shine, to really differentiate yourself. So it's an opportunity as well as a threat." In the UK many firms are already acting in the spirit of the law, he added.

He said: "I think the UK is in, generally, a strong position compared to the rest of Europe, mainly because a lot of the stuff was by and large a de facto standard already."

Mike Davis, senior analyst at Ovum, reckons UK organisations are slightly less well prepared. He told "To my knowledge, a lot of the financial institutions are still playing the wait-and-see game."

But he agreed that it's still unclear who will enforce punishment for non-compliance. He said: "There's nobody to do the enforcement anyway."

An FSA spokesman told "We expect firms to make all reasonable efforts to be in compliance with all of the new MiFID-based requirements from 1 November."

He added: "We have recently provided guidance to firms as we believe it is important for firms to know what our priority areas of attention will be while they are progressing their implementation projects and beyond."

But as to what would happen after 1 November, he said: "We will take appropriate action according to the circumstances."

The FSA plans to take a risk-based review of implementation in the first quarter of 2008 and will focus on areas where more significant risks to consumers and market confidence are likely to arise.

BearingPoint predicts that although the directive will be up and running by early 2008, it will be 12 to 18 months before "significant and lasting impact is felt". Which means that 1 November may just be the beginning, and not the end, of the MiFID adventure.

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