The Markets in Financial Instruments Directive will have a major effect on the roles and relationships between exchanges, members and information vendors and how they conduct pan-European business. As an exchange owner and technology solutions provider, OMX takes a strategic and tactical point of view to meet the opportunities and challenges of a changing competitive landscape.

Facts about MiFID
Full name: The Markets in Financial Instruments Directive
Objective: To encourage competition, openness and accountability in securities trading
Applies to: All firms that conduct securities business on regulated markets in the European Union
Deadline for compliance: November 2007
Instruments covered: A host of tradable securities, options and money-market instruments

In 1999, the EU made the decision to strengthen its competitive position by creating one pan-European financial market and subsequently harmonized and common financial regulation. In this spirit, the Financial Service Action Plan, FSAP, was presented. The Action Plan is comprised of several directives including MiFID.

OMX has been working with FSAP and MiFID for some years from a strategic and tactical point of view. MiFID is intended to encourage more innovation and competition and, in turn, to help end investors by creating more choice and transparency. At the same time, there are risks involved, for example, the specific types of competition being encouraged could lead to fragmentation, reduced liquidity in key market segments and higher transaction costs.

MiFID fosters competition by making rules and requirements more harmonized within the EU and by removing some of the barriers for trading. Most obvious is the removal of the option to introduce a concentration rule, meaning that trades have to be done at the exchange, and clearly making internalization (investment firms trading in-house) possible.

As such, MiFID will have a major effect on the roles and relationships between exchanges, members and information vendors and how they conduct pan-European business.

Investment firms will be able to organize trading, both against own accounts i.e. internalize trading outside the exchange and between customers, within an EU based legal framework. On a small scale, this can be done without having to consider extensive legal requirements. If it is done in a systematic, organized and frequent manner, there are a number of legal requirements that will have to be met.

Exchanges will have the opportunity to introduce new trading models in order to strengthen order book trading. The best execution obligation for investment firms, together with the more innovative environment, will change the market structure including more specified services to institutional or retail clients. With increased competition, exchanges would most likely try to capture other parts of the value chain.

Information vendors will have the possibility to change the way they collect and publish trades. As a consequence, they will be able to move along the value chain by establishing more direct relationships with investment firms trading OTC or by setting up their own trading systems.

On our own exchanges in the Nordic and Baltic region, OMX is creating a fully harmonized Nordic marketplace. MiFID makes it easier for such an approach on a European level. In this context, we are also exploring new ways to meet customer demand from listed companies, members and investors.

In addition, OMX is working with its technology customers in Europe to meet the opportunities and challenges of a more open competitive landscape. How connections are made to/from the exchanges, order handling and new services should be considered. New functions may need to be developed. Education on new rules and regulations will be essential. The organizations that start to make changes based on their competitive goals will be most ready when and after MiFID takes effect.

Responses to open competition will not only be seen in new services, but also in moves to consolidate or cooperate -- between exchanges and/or other service providers -- to reduce the number of players and capitalize on the natural benefits of scale, synergies and presence in different markets, as well as to enhance cross-border trading that will be demanded in the long term by end investors.

To explore the new pan-European opportunities, technology and connectivity will be important tools. OMX has a wide range of solutions designed for all stakeholders in the value chain as well as the knowledge to tailor cross-border solutions.