Charlie McCreevy gets serious about MiFID

MiFID (the Markets in Financial Instruments Directive) is big news in European Union financial circles. For those familiar with Reg NMS (Big PDF) in the US, MiFID is similar in intent but for EU markets.

The short version of what it’s about goes something like this: Suppose you are an investor and you ask a broker to execute a trade on your behalf. How do you know that they will get you a good deal? With current market structures and regulatory mechanisms you have very little by way of visibility or guarantee. MiFID is designed to change that.

“The finalised MiFID is set to be rolled out in November of this year with the aim of creating a single European securities standard for all financial instruments.

Among the 73 articles and 71 recitals are new pre- and post-trade transparency requirements for equity markets, and more extensive transaction reporting requirements.

Companies must be able to fully reconstitute not just transaction data, but the full progress of any transaction for five years or for the duration of the relationship, which for transactions such as mortgages can be very long indeed”.

                                                - Ian Williams, vunet.com, 25 Apr 2007

(Ian was commenting on a recent report from P J Di Giammarino of the JWG-IT think tank).

Charlie McCreevy, EU Commissioner and former Irish Minister of Finance, is getting serious about ensuring EU countries open up their markets by legislating MiFID:

 "I urge Member States to keep to the timetable that they themselves have agreed. Further delays could well expose Europe's firms and banks to serious competitive disadvantage”.

                                                - Charlie McCreevy, EU Commissioner, 26 Apr 2007

So what’s the hold up? Ian Williams set it out in the above referenced article:

“The cost of MiFID implementation is set to surpass £1bn in the UK alone”.

                                                - Ian Williams, vunet.com, 25 Apr 2007

The first problem is that the pre-trade and post-trade transparency requirements involve real-time surveillance of several dozen markets and MTF’s in various jurisdictions for prices and depth of liquidity assessments, followed by intelligent execution of the trade potentially across multiple liquidity pools and over some optimal time period. The latency requirement is as-close-to-0-milliseconds-as-possible. If the benchmark for “best execution” (something that is not well defined today) is broader than simply price and timing variables then automating it is correspondingly harder to do.

The second problem is that there is a requirement to be able to demonstrate that for a particular order the execution was in fact Good. Given the number of transactions and the amount of data required to put together a report on any one transaction for the purposes of proof, this is a substantial storage, retrieval and analytical challenge.

There are various other pieces of MiFID, including capital sufficiency requirements, client data management and other non-real-time things. Those are naturally of peripheral interest from a CEP point of view.

One way to address this is a “Crawl, Walk, Run” strategy. The StreamBase MiFID offering is about engaging a phased, iterative program that reduces cost, risk and implementation time. It also sets up a very flexible solution that can evolve with the MiFID requirements and the roll out of MiFID across Europe.

I suspect that Charlie McCreevy is right, that some jurisdictions and financial institutions will miss the November 2007 deadline, to their financial detriment. CEP is an important part of the solution.