We stand now less than six months before the 1 November deadline for the Markets in Financial Instruments Directive (MiFID) comes into force. The road has been long and fraught with delays and confusion since the Directive was announced as part of the EU’s Financial Services Action Plan. Barring any last-minute changes - which is conceivable given the way the regulators have kept moving the goalposts - implementation is almost upon us.
For several years now a gloomy picture has been painted around MiFID. Despite the benefits the directive is designed to achieve, including more efficient markets and increased competition between firms, independent observers and financial services institutions alike have claimed that the cost of readying IT infrastructures remains higher than any return they may receive.
Of course, banks should be used to meeting strict compliance requirements; the last few years have seen a raft of several major legislative changes. And with every new piece of regulation, optimists always highlight the benefits of compliance. But while legislation such as Sarbanes-Oxley and Basel was aimed at tightening processes and reducing risk, MiFID’s direct goal is to open up new opportunities.
Compliance and uncertainty
MiFID aims to create a single, seamless, financial services market in the European Union, maintaining overall efficiency and integrity of financial systems and creating a transparent framework for regulating order execution arrangements in European financial markets. It has meant a huge volume of work for many IT departments, notably in the fields of customer information systems, order routing, market data and communications infrastructure. Analysts have estimated that between 2006 and 2008, the industry will have spent around €1.5 billion on IT to achieve MiFID compliance. Although the situation across Europe is less clear, financial institutions in the UK are among the best prepared.
With final guidance still to be issued on certain aspects of the directive, many IT teams have either found themselves waiting until exact requirements are clarified before committing to further investment, or have made the necessary IT enhancements only to find they have had to start over again. Some are even looking to the situation in other EU states and reassuring themselves that if others aren’t completely ready, then they will not have to be either. It is still not clear whether regulators will strictly police every minor aspect of compliance from 1 November, or whether partial implementation in stages is acceptable. Industry figures have been very vocal on their dissatisfaction with how the directive has been handled - particularly around the delays and confusion over regulations - and continue to complain.
But this ongoing clamour is distracting from the most important issues at hand. Although further delays are theoretically possible, MiFID is a reality, and affected organisations of all sizes need to focus on the opportunities a post-MiFID world can offer. IT investment is a necessity, but handled correctly, it need not be a major burden; rather it can help companies reap benefits immediately.
The long-term impact of MiFID
MiFID is about so much more than a blind rush to November 1st followed by a return to business as usual. It offers firms the lucrative chance to expand into other European markets, trade on new platforms and offer customers a more varied choice of services and investment options. The firms that are best prepared to meet these opportunities are very likely to increase their market share and profits. But one thing MiFID can teach us is that IT’s role in the financial services industry is only going to get larger, and this presents another important opportunity. Overhauling IT processes does require significant investment and may seem like a chore, but it gives firms a chance to create a robust system that unites business and IT strategies in advance of the next major piece of industry legislation.
In addition to the post-deadline changes MiFID is bound to require as countries throughout the EU adjust, we already know of several other new financial regulations, such as SEPA, which are only around the corner. Firms that have taken the time to use MiFID as an opportunity to create a new flexible IT infrastructure and forge stronger relationships between IT management and the board, rather than just meet compliance requirements at as low a cost as possible, will have a clear advantage over their competitors.
The key is flexibility; having an IT infrastructure that can adapt and react to market changes quickly and with minimum further investment needed in the event of new legislation. Expert counsel is also crucial: IT providers must be capable of delivering deep industry expertise and guiding business executives towards ensuring every piece of the IT puzzle is focused and flexible enough to deal with future changes. IT requirements must be streamlined IT in line with business objectives - for MiFID and beyond.
An on-site presence is also vital to ensure IT makes the most of its potential as a revenue-generating and transformational tool. This may sound obvious, but too many outsourcing companies are still selected and used on a “throw it over the wall” basis, where the work is handed over to an offshore company told to deliver as cheaply as possible. Such an approach simply cannot create a strong enough relationship to understand a company’s IT and business needs, nor deliver the benefits MiFID promises in the longer term.
To really make the most of the opportunities available, an IT supplier has to employ a local team to be tightly and seamlessly integrated with on-site personnel. Working alongside client IT and business teams, they are close enough to see how each element of IT is performing, and identify when there may be a better way to achieve a particular goal. They can also take feedback from the client as and when IT requirements change, and ensure the offshore teams are informed immediately. Although to achieve MiFID compliance many companies are focussing solely on the exact areas which need to be updated, ideally a firm’s IT outsourcing strategy will extend into all areas of the business, helping to break down barriers between departments and exploiting significant economies of scale through common methodologies and techniques.
By looking forward to what challenges IT will face after MiFID and approaching implementation in this way, rather than continuing to moan about what needs to be done by November 1st, firms could find they are in a far better position next time.
So the journey to the deadline is almost over. How firms in the UK and the rest of Europe cope with the change remains to be seen, but those who understand the opportunities a post-MiFID trading environment will bring - and have adapted their IT to suit will - be in the best position. For any falling behind or still complaining, the message is simple: investment in IT should not be about quick fixes, but ensuring your infrastructure is flexible enough not only for further industry legislation but also changing business strategy so it is able to drive bottom line impact.
Raghu Venkatesam is a director of banking and financial services at Cognizant