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In November 2007, the Markets in Financial Instruments Directive
(MiFID) replaced the previous Investment Services Directive. The
Financial Services Authority in the UK, working with HM Treasury,
was one of the few regulators to meet the January 2007 deadline
for transposing the (Level 2) MiFID Directive into national law.
The stated aim of MiFID is to allow investment firms to apply for
a 'passport' allowing them to market their services across the EU.
But MiFID does a lot more than that.
Firstly, it abolishes the old 'concentration rule' which allowed
EU member states to force all trading onto a single Recognised Market.
This creates new opportunities for Multilateral Trading Facilities
(MTFs) to try and take liquidity away from the established exchanges.
Chi-X and Turquoise are two new-entry MTFs who intend to play just
this game.
But what happens to liquidity and price formation as a result of
this fragmentation? If market participants cannot see everything
that is going on, it will be harder for firms to be sure they've
achieved best execution for their clients. And MiFID sets some pretty
tough rules on proving best execution.
To address the problem, MiFID introduces a whole range of pre-
and post-trade transparency requirements on market players, to ensure
that information about price quotes and filled orders is published
widely and promptly, and in a way that facilitates data consolidation.
MiFID allows for any suitably approved entity to act as the data
consolidator/publisher - another challenge to the traditional dominance
of the exchanges.
Project Boat, set up by a consortium of nine investment banks to
provide just such a service, is already afloat, with a number of
high profile sign-ups.
MiFID also requires a great deal more T+1 transaction reporting
to the regulators, bringing a huge range of derivatives trades into
scope for the first time (incidentally creating a massive demand
for new ISIN codes on the way). The channels by which transaction
reports can be made are many and varied - here are the main the
possibilities:
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direct to the FSA's own Transaction Reporting
Service (TRS) |
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via CREST existing transaction reporting facilities,
which are being enhanced for November 2007 |
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via CREST's proposed new XML-based transaction
reporting service, planned for June 2008 |
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via the ICMA's TRAX2 matching and reporting service |
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via the London Stock Exchange, LIFFE, and other
exchanges |
It should be clear from the foregoing that the main practical impact
of MiFID is to generate a demand for more interfacing, of more kinds
of data, more quickly and with higher quality than ever before.
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