A strategic approach toward MiFID. Capgemini offers a pragmatic business oriented end-to-end solution that not only envisages MiFID compliancy but also aims to leverage the MiFID requirements toward the improvement of your business.
The Who, What and When of MiFID
This year the European Union will ratify new legislation related to investment intermediaries and financial markets. This new legislation, named Markets in Financial Instruments Directive (MiFID), forms part of the European Unions Financial Services Action Plan (FSAP) and replaces the previous Investment Services Directive (ISD) of 1993. The new Directive, which aims at increasing market transparency, harmonization and investor protection, broadens the scope of current regulations. Entities affected by MiFID include: investment banks, portfolio managers, stockbrokers & dealers, corporate finance firms, futures & options firms and some commodities firms. Currently, MiFID will come into effect as per 1st November 2007.
Objectives of the Legislation
MiFID comprises two levels of European legislation: Level I is the Directive itself, comprising 72 Articles and adopted in April 2004. Level I is supplemented by the Level II technical implementing measures. The objective of MiFID is to create a single market in financial services by:
- Increasing market transparency, that is: level the playing field through pre- and post-trade transparency.
- Increasing investor protection, i.e., by requiring that advice to clients is appropriate and suitable. Further protection is afforded through the more detailed organizational and conduct of business requirements.
- Increasing competition and efficiency through elimination of the ‘concentration rule’ and increasing the range of ‘core’ investment services and activities that can be passported. Examples are commodity derivatives, credit derivatives and personal advice.
MiFID in a Nutshell
MiFID has an impact on all areas within investment firms, i.e. front, middle and back office. In order to give you a structured overview of what MiFID could mean for your business, we have grouped the areas according to the trading value chain approach. Through this approach, we distinguish three main clusters of activities: Client Orientation, Trade Orientation and Organization & Reporting. The MiFID impact areas for these activities are stated in the figure below.
Figure: MiFID’s impact grouped by trading value chain (the article numbers refer to the 2004/39/EC Directive).
The MiFID Challenge
Every player in the European financial services industry has the challenge to become MiFID compliant by November 2007. As MiFID touches numerous parts of your organization and the technical implementation measures of the MiFID requirements are still under discussion, MiFID implementation is a highly complex exercise.
Certainly, there are various ways to tackle the MiFID requirements — one could opt for a more functional approach in which you make your organization ‘just’ MiFID compliant by sticking to the rule set. In this way, MiFID is perceived internally as a ‘compliance program’ and hence as just another set of rules to be embedded in your organization.
Capgemini, however, advises that MiFID is viewed as a ‘business program’. That is, a program that does not solely focus on MiFID compliance, but also seeks opportunities where MiFID could enhance your business model. A few examples of this business approach include:
- Can we change/renew our positioning in the market when a profound appropriateness/suitability test is executed for our clients?
- With which other programs can MiFID be aligned or take advantage of? For example, when implementing a customer loyalty program, how can we incorporate MiFID requirements?
- With the elimination/reduction of barriers for competition, there are new opportunities for a broader service and/or product range offering throughout the EU. How can our company benefit from these opportunities?
- Strategic decisions to eliminate cost, i.e. exchange membership and settlement costs may be reduced by becoming a systematic internaliser (SI) or operating a MTF.
- Third party services could be provided (and charged for) with relation to regulatory transaction reporting and post-trade transparency.
By approaching MiFID in this manner, you can turn your MiFID compliancy program into a business program through which competitive advantages can be obtained. MiFID can then be used as a pathway for growth.
Making your business MiFID compliant beyond just sticking to the rules requires a strategic approach. MiFID might require new ways of working in your business. In our opinion you should know what you are trying to achieve and have the right team and support in place. Capgemini offers the support to achieve this.
