MiFID is billed as further liberalisation of European securities markets. What began as a measure to challenge national stock exchanges protecting domestic franchises and ‘national champion’ status has become a directive that is an extensive re-write of existing broker-dealer and fund manager business conduct rules for buying and selling securities in the secondary markets.
The aspects of MiFID that address market structure and price transparency are new and may influence change in European securities trading. Project Turquoise is an initiative by seven investment banks to create a new trading platform which promises to charge lower transaction fees than incumbent stock exchanges. MiFID facilitates such initiatives. Some observers fret about the fragmentation of market places. Others welcome the emergence of ‘dark’ pools of liquidity and put their faith in technology to pull multiple price sources into a single tape of timely and transparent price data.
The rest of MiFID is made for compliance officers and consultants. The topics are for compliance enthusiasts only: client classification, best execution policies, conflicts of interest and suitability duties. Commodity derivatives (with some tortuous exemptions) are subject to EU regulation for the first time. Each of these subjects is likely to spawn a paper chase. Clients will regard the revised documentation coming from each firm in the next six to nine months as an unwelcome deluge.
One beacon of light in the darkness has been the willingness in the UK of financial services trade associations to club together under the name MiFID Connect, advised by Clifford Chance, to help both the buy-side and the sell-side identify points of difficulty, discuss these with the Financial Services Authority (FSA) and then publish guidance that helps the industry to comply with the new standards introduced by MiFID. MiFID Connect guidance on outsourcing obligations under MiFID was recently approved by the FSA — a first for industry-sponsored guidance and a new twist on how the industry, through a form of ‘self-regulation’, can share the weight of the regulatory burden carried by the FSA.
While the implementation of MiFID will allow the European Commission to say there is a single rule book for
MiFID ties in to revised prudential rules based on the Basel II regulatory capital regime for banks. This leaves a number of different interest groups within the European financial services industry looking at substantially increased capital requirements when MiFID is introduced. European managers of private equity funds are one such group. Management structures in the private equity industry have evolved over the past 20 years to ensure that the regulatory burden is maintained at a proportionate level. MiFID might make life more expensive and complicated for investment managers, including those managing private equity funds. What positive outcome does this additional regulatory burden achieve?
In other ways MiFID represents a missed opportunity. Yet again, the European directive machine is prescriptive about matters that are internal to