Spotlight shines on MiFID in London

01 February 2006News

Virginie O’Shea and Joy Macknight

The Markets in Financial Instruments Directive and its potential effect on the financial industry was the centre of attraction at Finexpo, an annual technology event for investment banks and capital markets institutions. Sessions discussing the issues of MiFID were filled to overflowing, particularly the seminars hosted by Dresdner Kleinwort Wasserstein’s IT director of strategy Bob Fuller and Oracle UK’s head of capital markets Nigel Matthews.

The day’s climax came after the timetabled events, with SunGard’s MiFID roundtable. Around 80 people stayed late to hear a number of industry players talk about the issues, including speakers such as Alberto Giovannini of the Giovannini report on EU cross-border clearing and settlement arrangements and, for a second time, Bob Fuller, who is also co-chair of the MiFID joint working group.

Two issues became apparent during the roundtable: 1) the actual status of MiFID either as a directive, which would allow for some national tweaking, or as a regulation, which is directly applicable; and 2) the tight timescale of November 2007. There was some frustration felt in the room over of the lack of a ‘finished product’ that financial firms could really respond to.

Stephen Hanks, head of Market Monitoring Department, European Financial Services, HM Treasury, said that the European policy was not yet developed on the issue of the measures and that the consensus process made for a long negotiation period, so the industry was expecting at least another three months of debate. He denied that the UK government had a blueprint for how the industry would work post-MiFID and said that “it would not push the industry in a particular direction”.

Because of the tight deadline, one question from the floor was whether a phased implementation was needed. Hanks responded that it was not that simple but emphasised that the deadline would not be changed, even though a uniform implementation would probably not happen. Fuller reminded those present that MiFID was not the only thing in life, but there was also SEPA and many other regulations coming in a similar time frame, and the key is to implement IT wisely and cost effectively.

All agreed that the process of compliance was not going to be painless. Giovannini, who is also chief executive, Unifortune SGR, an asset management company, said: “MiFID throws out of the window business rules that financial institutions have made a lot of money out of. People will have to rethink how they make money and what services they will offer to their clients.”

Fuller also warned that MiFID won’t stop when the ink is dry on the proposals. “That is when it will begin. We are trying to change what we do in Europe in order to create a more efficient capital market and that will require us to change or modify our behaviour over time.”

As well as numerous sessions on the impact of MiFID, the issue of operational efficiency was also a popular topic for vendor presentations. Wall Street Systems, SunGard and Smartstream all focused on the area of operational efficiency and straight through processing during their respective sessions.

Garfield Hayes, head of client research and strategy at Wall Street Systems, explained his vision of what banks will need to do in order to retain customers in the future, including dealing with the “reputational risk speed-bump” of increased regulation. He suggested that product diversity and increased levels of customer service will be essential means of customer retention over the next 10 years.

The trend towards increased spend in technology, as demonstrated by Financial Insights’ recent survey, which indicated that technology spend in capital markets is up by 6% so far this year, was highlighted by all the vendor presentations. Hayes pointed to service oriented architecture and workflow management as areas of potential investment and “key stepping stones” to operational efficiency. Increased volume sensitivity and the resulting need for scalability and the development of multi-channel strategies were also underlined.

Hayes discussed Wall Street Systems’ white paper on STP rates and the cost per trade calculations and used it to draw attention to efficiencies in certain markets such as the FX market and money markets with regards to STP levels. He believes that the winners in the banking market in the future will be those that consolidate their back office applications and work together in strategic partnerships.

This was reprised by Paul Harknett, director of pre-sales for Smartstream Technologies, during a later session as he emphasised the need for financial institutions to invest in IT systems in order to gain greater efficiency. However, Harknett went one step further and extended this to the issue of exceptions and investigations and the need for consolidation and greater automation in the reconciliation space.

“We need to shift from single views to one view of a whole account for reconciliation. This will allow us to be pre-emptive in exceptions and investigations and learn from past data,” Harknett explained.

Colin Day, director of product strategy for SunGard, agreed and stressed that the idea of full STP is not an idealistic notion, rather it is an entirely realistic vision, for the future. Straight through exception processing is an integral part of this future, but in order to realise this vision “roadblocks” such as standardisation must be overcome.

Day discussed SunGard’s Sibos survey results which indicated that full STP for exceptions and investigations is far from a reality at the moment: with only 33.33% of respondents having automated this processing. However, he was optimistic for the future and said the benefits of providing additional functionality to clients would far outweigh the costs of implementation.