One of 42 directives of the European Commission’s Financial Services Action Plan (FSAP) the Markets in Financial Instruments Directive (MiFID) came into effect November 1, 2007 (after 2 official delays) when it will replace the existing Investment Services Directive (ISD).
Sometimes called ISD2 this next generation policy will attempt to address the European financial service regulations by bringing it in-line with the rapidly evolving global financial industry and streamlining the European market place.
Simply put MiFID will allow European financial institutions to provide services anywhere in Europe. It will also allow shares to trade ‘off book’ between eligible entities circumventing the exchanges.
But how will this affect Asia? For Asian firms that focus solely on Asia there will be very little, if any, impact at all. It’s the international firms that have an Asian presence where the affect will be most felt. For example, under Article 21 of MiFID ‘Best Execution’ is a fundamental element in client protection and entails more than just getting the best price for the client.
Firms will be required to provide information on different execution mediums and the reasons why the firm uses these mediums. Also, firms must be cognizant of speed, whether or not the order will be executed and settled, the size of the order and any other extraneous circumstances affecting best execution.
For client orders that are retail in nature best execution is largely determined by brokerage and as such the details of the costs directly involved to the execution must be disclosed such as execution source fees, settlement and clearing fees and other third party fees. Of course this will all need to be monitored for compliance and operational inefficiencies proactively improved. Additionally, MiFID requires that a firm can prove best execution compliance for up to 5 years. This means storage of records and systems to manage them. Asian operations will need to spend money on technology and expertise just to fulfill the best execution requirement.
MiFID is also introducing a new three tier client classification system. Clients will be classified as either retail, professional or as an eligible counter-party. Consider the Asian headquartered firm soliciting European clients. This firm will have an office in Europe, governed under MiFID, and under the three tier requirement will have to classify these clients accordingly. However, the local jurisdiction client classification policy might be entirely different. These regulatory incongruities must be managed.
There are other considerations such as updating the current business policy and client account agreements. Each existing client will have to sign this new documentation. Or non-compliance. What will the penalty be?
How can financial firms in Asia prepare for MiFID? If they haven’t already they should be discussing with their European counterparts how their operations will be impacted. If clients are indeed affected firms should be moving to assess any information they should provide to or gain from their clients prior to November 1, 2007. Also, if services provided in Asia will be affected then they should be discussing with their European counterparts a work around solution and update their procedures accordingly.
Now that the Markets in Financial Instruments Directive goes live has the European Commission’s Financial Services Action Plan taken the lead with its overhaul of the 24 year old Investment Services Directive and to modernize its financial industry? Will it really benefit the end client and bring efficiency to the European financial industry? Or will it impede business in other zones such as Asia and isolate Europe like Sarbanes-Oxley did to the United States? Time will tell.