Equity Market Change

Over the last year or so, the European securities markets and the business model that participant banks have been using has undergone radical change, both from regulation (e.g. Liquidity risk reporting, MiFID) and also over recent months through market conditions, bank failures, the end of large, independent US investment banks and resulting rapid consolidation. MPI Europe are working on projects in this area and developing solutions to address the markets changing needs. For more details contact us More >>

What changes must investment firms implement?

Unbundling/commission sharing - Recent changes in regulation and market practice have resulted in the growth in volume and sophistication of requirements to agree and manage commission sharing and unbundling in the equity markets. Firms who cannot support these more complex arrangements and provide a simple, efficient and transparent process to support their clients’ needs are increasingly at a disadvantage in these ever more competitive markets. Even firms who have traditionally coped with these types of arrangements using manually intensive processes are now finding them difficult to scale and monitor with any confidence. MPI Europe has engaged in project work and research on this topic across a range of financial institutions from brokers to hedge fund managers. In this way we have identified many common issues faced by firms and the pragmatic solutions that we can help clients implement. To understand more go to our section on commission management. To join our Commission Management group on to see discussions on the latest topics and keep informed of future updates.

Execution Policy - MiFID mandates that all investment firms must prepare an Order Execution Policy, that must be shared in summary form at least with clients, to document the way the firm will process client orders. This should cover a spectrum of execution scenarios from specific client instructions, though to where the client passes the firm significant latitude as to where and when the order is executed. The firm must always act in accordance with this policy and in the best interests of the client. Under MiFID clients can ask the firm to prove that they provided "best execution" in accordance with their policy for a set of trades. There has been a surge in interest in Transaction Cost Analysis tools and services which many firms are now looking to use to satisfy this requirement.

Trade and Transaction Reporting - There are significant changes and increases in scope of both trade and transaction reporting for firms under MiFID. They are also being asked by their clients to provide more comfort that they will fully comply.

Client Classification - In line with regulator guidelines, investment firms will recategorise all their clients into one of three categories - retail, professional and eligible counterparty. Each has different levels of protection with retail having the most and eligible counterparty the least. The classification also has significant impact on the suitability and appropriateness checks that need to be made before dealing in more complex products, in particular with retail clients. Most institutional firms are opting for professional status so they benefit from "best execution protection".

What are some of the impacts on exchanges?

The new market model is having a significant impact on exchanges and alternative venues which we have covered in some depth in our financial sector bulletin. In addition to the abolition of "concentration rules", MiFID has also facilitated the creation of alternatives to the traditional exchanges such as Chi-X, BATS Trading, Equiduct/Borse Berlin, Turquoise and other Multilateral Trading Facilities and a number of investment firms who will act as Systematic Internalisers under MiFID to offer prices for smaller amounts of liquid stocks. This means it is highly likely that there will be a significant fragmentation of equity trading/liquidity during 2009

MiFID - a case study of change

The Markets in Financial Instruments Directive (MiFID) is European Union legislation that applies across all member states from 1st November 2007. Its objective is to create a single pan-European regulatory regime for investment services, by abolishing practices such as “concentration rules” that, in certain countries, require that all equity business is conducted on exchange, and requires changes to client classification and protection, trade execution and pre and post trade transparency mainly but not solely in the Equity market.

We have completed the Programme Management of a significant banks MiFID programme and have done work involving order management systems such as Fidessa. We have also completed a number of thought leadership projects, helped set up a MiFID “think tank”. Out of this wealth of experience we have a specific MiFID offering which we are actively marketing to banks.