Even with the deadline for compliance now pushed back to November 2007, there is still pressure on market intermediaries, exchange members and others to prepare for the Markets in Financial Instruments Directive, or MiFID. OMX experts say that, with so many details left to be worked out, it’s difficult to know how the directive will affect trading in the long run but, they say, now is the time to prepare.

The Markets in Financial Instruments Directive (MiFID) has something for everyone involved in securities trading, with 73 articles covering everything from conflict-of-interest disclosure to transparency in pre- and post-trade activities. MiFID affects all market participants, from banks that conduct securities business to alternative trading venues, from brokers and hedge funds to exchanges.

The deadline for compliance has been postponed twice as regulators wrestle with exactly how it will be implemented, but it is now set for November 2007, less than two years away, and those watching say it’s too early to know MiFID’s true impact. “Everybody hopes it will be good for trading,” says Claes-Urban Dackberg, Vice President, Member & Products, Cash Market at the Stockholm Stock Exchange. “The problem is that there are many details still being developed.”

MiFID is intended to build on previous regulations to encourage more innovation and competition and, in turn, to help consumers by creating more choice and transparency. At the same time, observers say, there is a risk that the specific types of competition being encouraged could lead to fragmentation, reduced liquidity in key market segments and higher transaction costs.

“It certainly opens up possibilities and more options to trade in new venues,” notes Andreas Gustavsson, Legal Counsel for OMX Exchanges. At the same time, such venues would be subject to a host of regulations, many still being worked out.

Consulting and analyst firms are advising clients with exposure to trading in Europe to begin preparing now, especially if they need to build room into their 2006 annual budgets for the information technology investments that will be needed for compliance. Others advise firms with potentially large exposures to dedicate a project manager who can stay apprised of future changes and keep a firm schedule to meet deadlines.

Observers say one outcome is almost certain – that complying with MiFID will require sizeable IT investments and changes by major players. “Everyone’s going to need a certain amount of time to finalize these IT solutions, be it a new way of handling client orders or adjusting their order management system,” says Gustavsson.

The best place to start is with a plan, ideally one based on how a participant wants to take advantage of the new, more open competitive landscape. “It’s important for members of stock exchanges to start discussing these issues with the exchanges or other stakeholders in order to develop new functions or provide more services if there’s a need for it,” Gustavsson adds. Those who start early will be in the best position to gain the competitive upper hand, especially if they are willing to strike partnerships based on the positions they’re carving out for themselves.

And, says Dackberg, outlining those future goals is a starting point. “They need to decide what exchanges they need to connect to and their order handling procedures,” he says. “Education on the requirements for traders and on how not to violate any new rules will be essential.” Firms that start to make changes based on their competitive goals will be most ready when the final changes are made, Dackberg says, counseling, “Move forward, but be flexible in your planning. Leave yourself options.”

“Right now there are only potential winners and losers,” he continues. “Still, it’s fair to assume that firms that plan now for the arrival of future changes will likely be in the best position. Planning is the key to being a winner in the end.”

Andreas Gustavsson’s advice is for firms to be patient as the final regulations work their way through the approval process, and not to struggle against the impending regulations. “Be open to the changes,” he says. “Try to work together with these changes – not against them.”

By Keirth Regan Photo Getty Images

MarketView 2005:4