MiFID I

After a multitude of articles on the policy objectives of MiFID II, the new obligations of the buy- and sell-side on research and trade reporting, and the new requirements for transparency in fixed-income markets, Thomas Murray finds itself in the position of having to see how trading begins to adapt as the Directive comes into effect at the start of the year. Specialising in post-trade infrastructures and services, its business lines are not in the immediate lines of fire of this reform – its clients are, but in other of their activities.

The authorities with whom we have spoken caution that the new shape of the EU capital markets will not take form immediately, judging from how long it took to see with any certainty recurring patterns in trading after the implementation of Regulation NMS in the US and MiFID I in the EU. We have been advised to expect a period of 12-18 months in which time the order flows and ways of execution will have settled under this new regime, assuming that this adaptation is not unduly thrown off course by world events, unforeseen technological changes, and of course economic and financial changes that would alter significantly today’s outlook on trading and investment conditions. This truly is a complex mix of variability, one which does not give even the keenest of observers a clear view ahead.

Possibly the most complex piece of capital markets legislation to hit the markets since the Dodd-Frank Act in the US in 2010 is nearly upon us, the European Union’s revamping and extending of the Markets in Financial Instruments Directive (MiFID I) promulgated in 2004, with effect in November 2007. That was one very long decade ago, given events in financial markets over the period.

Financial market professionals working in the EU and outside it will be affected, some heavily. Its immediate, most visible impacts are on transaction order transparency pre-trade, transaction reporting post-trade, and the separation of research from bank/broker trading commissions. The changes will likely go further: as with most rearrangements in the intricate chains of financial services, there will be knock-on effects beyond the immediate targets of the authorities, though what they will be is hard to define beforehand.

Quite rightly, there are veritable storms in capital markets conferences and the press about what needs to be done to prepare for MiFID II, due to take effect in 4+ months. There seems to be little chance for a further stay of execution, but then, with remarkable irony, MiFID I hit securities trading in November 2007 as the Global Financial Crisis was deepening, leading to the most massive destruction of capital in decades, and so undermining large swathes of the world economy. Regulators cannot time such matters, and the preparation of reforms based on broad public consultations and multiple drafts takes years. Still, we are where we are: perhaps some sort of progressive implementation would be sensible. If the authorities are certain of the value of their objectives, then surely it would be worth demonstrating some flexibility.

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