MiFID Implementation Brussels
The Commission has a challenging time ahead as the time will be as agreed and there will be no further extensions. There will be eight workshops to ensure member states arrive at a common positions and interpretations on implementation and details will be published on their website. CESR are working with experts on level 3 through European experts group for MiFID and other directives. For example determining the boundaries between UCITs and non UCITs transactions in the context of branches.
Article 4 is the exception rather than the rule but gives some flexibility to protect investors or for prudential reasons. Article 65-1 on bond transparency will be published next week. Today all the main infrastructure providers should be signing up to a Code of Conduct on settlement. It is certainly a persuasive argument for organisations as there is no reason why they should not accept these basic principles.
MiFID needs to produce some innovation in the market. FSA is simplifying their rule book ready for a more dynamic and simplified market. The rules are basically good but time is short and the Commission will not accept delays. They will pursue infringement procedures against the laggards.
Emmanuel Lacresse gave us a French perspective. Their challenge is to deliver the text on time, properly and with quality so it is simple and effective. With the primary legislation published on 4 September some delay has to be expected especially to produce the necessary secondary legislation. 70% of the text can be delivered through primary legislation and there is a proper consultation process going on.
In France awareness is now widespread. However it is seen as a legal obligation with a lack of confidence in the opportunities. There is also a lack of confidence in public authorities to refuse gold plating. The underestimation of the opportunities has meant few projects have been announced. There is still time to correct the process. The quality of implementation should be more important than the timetable and CESR should ensure quick installation.
Maria Valentza, Deputy Head of Unit, Securities Market of the European Commission told that cooperation by member states needed to be optimum. Timely and good implementation creating convergence was essential for the passport with a level playing field and consumer protection. Rumours of delay have been going around but it will definitely not happen and is out of the question.
Transposition is planned for January 07 and implementation by November 07. Member States are not allowed to merge the 2 dates and if January 07 is not in place it will be difficult to achieve implementation in time. Short deadlines are a feature of the Lamfalussy process and consensus is essential but this is time consuming. Transposition workshops have been running since April 06. Consultation alone is not the same and often ends up with complete opaqueness. They have a question and Answer database to try to consult states and the response has been very helpful. The Commission is not an ivory tower and they want views to achieve a consensual view.
Article 4 is a flexibility clause and not about gold plating. It does not allow deviation form the principles and there are material conditions including a notification procedure and assessment. The Commission invite states to talk about Article 4 provisions. Quantity is not everything and this is the first state with a quality check as part of the process. It is a dynamic process adapting through comotology. There have been 10 reports on level 1 and 2 and they will see if it functions well but are not afraid to propose changes if necessary. There is no solution just a continuation of consultation with comprehensive results.
Andrea Munari Chief Executive of Banco Caboto s.p.a., Banca Intesa Group gave us an Italian perspective. MiFID is an unprecedented piece of legislation for Europeans and there has not been sufficient attention paid to it until recently. It has forced competitors to think of the consequences for industry and for the country.
The technology side has been over estimated and is really not very important. Investment in compliance is vital and Italy needs to catch up. The return of transparency is something investors need. In the past they have not been focused enough but now we see it as important legislation. Compliance is the key and there is a squeeze in the labour market with people not used to this.
Officials are keen to maintain deadlines and this will help with competition. He is happy there will be no postponement but is concerned about gold plating. He hopes European authorities work hard on this as it is a risk that needs to be prevented. There is still enough time and implementation could be done with changes in Italy’s savings law which is a high debate in Italy. However he is optimistic overall and force within the industry is very important.
Carlo Comporti, Deputy Secretary General of the Committee of European Securities Regulators (CESR) said that time is tight for everybody and CESR could not work on level 3 measures until level 2 had been adopted. The first work plan CESR drafted was very ambitious and did not focus on the key areas but on what was necessary for the future. They changed their mind and refocused on the immediate priorities for 06 and 07. Impact of reducing the scope of the subject addressed at first market impact. Their work plan is therefore the passport, which is a key issue for investment firms. Best execution needs different consultation documents and convergence is important. Intermediaries and inducements have been upgraded and are completely new in some jurisdictions. Distribution convergence is the key to success. Record keeping and market data consolidation is also vital.
There are two other boxes to cover. The Commission needs to deal with non-equity transactions and commodity business with the revision of exceptions. There is also the level of free activity in banking and insurance and outsourcing of internal and also solvency requirements that has had less urgent interest from CEBs.
There will continue to be extensive consultation for at least three months reducing the time line of consultation is extremely important and as some issues were addressed at level 1 and 2 this should not be a surprise.
They are working for 6 months on an important project and a lot of coordination and financing is necessary. Implementation for ministries and transposition phase focuses on operational aspects e.g. discretion and options give. There are many and they have an internal list of options. MiFID consultation group is being changed to more operational people. Finally CESR must after 06 and 07 re focus on the more ambitious operation and implementation phase after November 07. There is more work still coming at level 3 and alls guidance should be out by February and March 07.
Fahri Ozdemir from Casewise then gave us an overview of a technology solution to handling regulatory change. MiFID is more challenging and ambitious in its scope and the timescale is aggressive. It is a moving target and not just IT but more a business issue from the top down affecting front, middle and back office.
The pre MiFID era is not just about implementation but it is a continuous process and process management is necessary to manage the business change. Their solution is very flexible to manage business activities and takes you through a cycle of development. Often businesses work in solo project teams for all the various legislation coming our way and duplication needs to be eliminated with a holistic approach that harmonise many of the requirements with basic methodologies and standards.
Process owners assess and the Compliance Officer can then view the whole situation and add his assessment of readiness. Everything can be scheduled on a server with automated messages.
The key issue is transposition and level 3 choices by regulators. The practical day to day measures do not need to be led by national legislation but the January 07 deadline has to be met. However it is still possible a firm with branches may need to report to 27 different authorities.
Christina Sinclair, Head of Institutional Business Policy of the Financial Services Authority (FSA) gave us an insight to FSA thinking. The FSA think of the wholesale side and not just retail. Industry generally supports Article 21 and this is important on the wholesale side and it is about process not just price. Best execution has attracted particular interest and is a continually evolving area and had to be revisited in the reforming Conduct of Business rules Consultative Paper. The UK is no exception and implementation is in the context of a changing regulatory environment, which is more minimalist and principle based. Firms must take all reasonable steps when implementing client orders and the best result taking into account 7 different factors. The May discussion paper played down price as factors should be accorded primarily on efficient price formation. However guidance on price has high relative importance for professional clients and in certain circumstance other facts are important.
The scope relates to dealer markets and portfolio managers but does not attach to execution dealers but under MiFID applies to all markets, activities or service. The client relationship is central and the consequence under MiFID focuses on the presence or lack of a client relationship whether best execution plies. Further flexibility on client orders if the client is relying on their own intelligence it does not apply. If the buyer asks for best execution they must apply of decline to deal. Access to a quotation service could be available only to customers who do not want best execution affecting both retail and wholesale.
The consequences may be best execution only where requested. If no client orders have to comply if they agree to provide. Recital 69 requires the best possible result with due regard to the wider market. There may be a conflict between best result and dealer’s profit. Using price indicated by a benchmark was suggested by FSA and AMF acknowledged benchmarking as a valid approach but no guidance was given due to industry negative reactions.
The principle is the same and all reasonable to best result. It is important best execution is flexible and proportionate. Implementation should be without overlapping obligations. There is an obligation to review and monitor through internal compliance and arrangements to achieve the best result. The majority believe is flexible and proportionate in the wider European context.
Henriette Peucker, Head of European Public Affairs, Deutsche Bőrse AG felt that best execution was the most complex part of MiFID however every regulator in the EU is quite different. Fulfilling the need for information on best execution to achieve low spreads and best prices to increase competition but this is not so. Germany has drafted legislation but it has not gone through Parliament and then it needs to go to local authorities who regulate markets. They are trying to be as liberal as possible but it has opportunities and threats and there is the chance of the threat of more competition. They are more prepared than in the past. Finding the chance of opportunity and hoping to meet the challenge.
Anthony Belchambers, Chief Executive of the Futures and Options Association and Chairman of MiFID Connect is leading a constructive debate in the UK. Trying to make the best execution work in markets for which it was not designed. Risk price will have to be factored in but the Commission decided not to prioritise price. Sometimes the transaction itself is the only one you can do. MiFID Connect is not a lobbyist group but more pragmatic on implementation benchmarking and specimen paragraphs with a practical implementation guide. Avoiding unnecessary change and reducing the risks of principle based regulation. Guidance is advanced but some cases are not written.
In principles best regime the scope of requirements and applicable standards and enforcement are need. Can we let go of the traditional regime? Best execution must be tested against factors that are a matter for firms to decide. Measuring the factors against different methodologies with a number of ways to measure them should be at the discretion of firms. There are still lingering issues but they have come a long way since the original discussion and it has been constructive and positive on both sides. Facing level 3 is a tight timetable. CESR has to be implementation critical and focus has got to be to stay with what is implementation critical. CESR must take the principle based regime to hear and carry through with determination.
Jane Low Director – Markets of the Investment Management Association said that asset managers see themselves as a dealer issue of UK concern. Members face retail in terms of promotion and not much of direct sales. The market is wholesale facing with 10% of assets fun products and 90% pension funds segregated post. There is a wide range of firms with members see a time to deliver. She is satisfied with the result and sees best execution as flexible with many already disclosing for pension funds. It is not perfect but workable and she hopes CESR will have time to focus on key issues and would like time to develop one policy.
The UK has substantial dealer markets. It did not expected debate on activities and services. Best execution is problematic in dealer markets and the debate is not about best execution but client status.
FSA have muddied the waters and the challenged reversal of August opinions is an argument about scope. Creating problems MiFID never intended if delaying is not client focused. FSA is in danger of losing the essentials of MiFID.
Jane raised the analogy of a customer buying a loaf of bread for a friend only to find a dead mouse in it. However when he takes it back the shop says it is not responsible. Is MiFID like asking who is responsible for the dead mouse?
Mark Goulden, Head of Markets Compliance JP Morgan Chase represented the sell side of the business and commended FSA on a workable compromise. There is little transparency and it is difficult to take best execution approach with bond markets. The next stage of finding a workable solution is important. £20 million cost for evidencing seems low and a fairly light touch approach. Robust interrogation will cost money.
The dead mouse is surely a failure of execution. If firms are worried about this it is open to the fund manager to demand best execution. Dealers will be able to offer best execution because they can choose the factors. If client status is removed firms will want to reinstate it through individual contracts, which is hugely inefficient resulting in collective bargaining on the sell side. It’s a lost opportunity.
The FSA Consultative Paper on New for now keeps the IDD and Menu but plans to review it but maintain the status quo for now. There is a difference between Article 21 and 19.
Reaction in Germany was bafflement and the main discussion in Germany is how things will change in the retail market. National law is clearer on differentiation. The real discussion lies in how to deal with the retail market. How you deal with other non-equity instruments is a challenge.
Deconcentration impacts and has to be made to work in a radically different environment. There are additional difficulties for some member states such as in Spain rather than Germany. You can be black and white about clients but a balance has to be drawn.
Piia-Noora Kauppi MEP, European Parliament worked with Theresa Villiers who originally launched MiFID before she went to Westminster and feels the EU Parliament is now more hands-off.
Hans Wolters, Chairman CESR MiFID Level 3 Markets sub group, Head of Policy, Netherlands Authority for Financial Markets discussed CESR level 3 work. The key issues are transparency beyond shares and gathering data, market transparency, common procedures and a calculations manual for CESR members, transaction reporting including the definition of a transaction and home host issues. The consultation paper on data consolidation covers three elements including the current landscape, MiFID changes to transparency rules and CESR guidance. MiFID changes transparency ending the concentration rule but gives grater flexibility and choice on publication channels. CESR will publish guidance on data quality, publication arrangements, availability of transparency information and publication standards
Timothy Baker, Director of London Investment Banking Association said it was wrong to assume the market cannot take advantage of data. We need to stick with what is implementation critical. Andrew Allwright Manager Regulatory Commercial Strategy Reuters felt there would be fragmentation and it is less clear what will happen. Firms may be close to convergence. Equiduct is a new venue for European shares. There is an expert requirement for calculation of order books.
Nick Dutton Manager, Regulatory Strategy of the London Stock Exchange felt that transparency was not the whole story. The final text of the MiFID regime gave transparency too much attention seeing it as an opportunity for progress. There will be a pan European regime and a model operating environment for many years to come.
Nickolas Reinhardt of Houston Group summed up the proceedings leaving us all with much to think about. A follow up event in London on 6 March will take the debate to wider European Directives at our second annual conference see www.epsilonevents.com for further details.
Anthony Smith FCII APFS FCoI
Director AJS Consultancy Services Ltd