MiFID'S Potential Impact on Europe's Securities Markets
The Markets in Financial Instruments Directive (MiFID) is likely to be one of the greatest legislative changes seen in Europe 's securities markets in over two decades. The intention of MiFID is to raise the standards of the European investment markets to US market levels and in particular, focus on best execution, investor protection, and transparency of trading.
TowerGroup believes that MiFID will impact all investment operators in the European Union, particularly broker-dealers on the sell-side. This is because MiFID makes it mandatory for a sell-side firm to publicly state its prices for equities traded on its own book, if the firm is a systematic internalizer.
TowerGroup believes that the typical broker-dealer classified as an internalizer will need to spend at least $22 million to comply with MiFID, with half of that spending on technologies including: algorithmic trading; workflow; business process outsourcing; market connectivity; FIX Protocol; service-oriented architectures; and data warehousing.
As a result, the costs of MiFID compliance could be extremely high. For example, systematic internalizers were initially defined as companies that traded more than 15% of their shares off their own account. This would have meant compliance costs of around $10 billion because there would have been at least 400 systematic internalizers in the European Union.
However, as TowerGroup anticipated in its recent research on this topic, the European Commission announced on the 6 th of September that they had dropped the 15% rule for internalizers. As a result, the compliance costs of MiFID for European securities firms have reduced significantly to a total spending of $1 billion (USD). Firms should also note that this drop in cost exposure is dependent upon a range of assumptions as to how the Directive will change between now and its final ratification in early 2006 by the European Parliament.
Two recent TowerGroup reports titled, “Europe's Markets in Financial Instruments Directive: A Primer,” and “ Europe's Markets in Financial Instruments Directive: Bigger than the Big Bang , ” by Ralph Silva, a senior analyst in the European Banking and Payments research service, and Chris Skinner, associate director, TowerGroup Europe, discuss the potential impact of MiFID on European securities markets as well as the ramifications of MiFID for dealers and dealing room technologies.