MIFID and what to do about it
July 2006
What is it?
The Markets in Financial Instruments Directive (MiFID), is a major part of the European Union’s Financial services Action Plan (FSAP) replacing the Investment Services Directive (ISD). MiFID incorporates four levels of European legislation. The Level 1 (outline) of MiFID was completed in April 2004. The more detailed Level 2 measures were published February 6, 2006 and are due to be finalised in the European parliament later this Summer. Level 3 are the local business rules and local regulations to be enacted in each country while Level 4 is the process for enforcement of the rules in the individual countries.

Once complete, MiFID will create a single market in financial services in Europe helping investment firms offer services on a pan-EU basis by removing national regulations and restrictions that currently inhibit such activity. Final implementation is planned for November 1, 2007.


What areas of MIFID are relevant to traders and tradingcompliance?

Arguably the most important new feature of MiFID is that it does not distinguish between different types of asset so its impact is not just related to equities but also covers fixed income, derivatives and other traded securities. There are three main areas MiFID will impact that relate to traders and the trading process;

- Pre-trade transparency
- Post-trade transparency
- Best Execution

Pre and post-trade transparency have their most direct impact on exchanges and dealers who choose to act in the role of a “quasi exchange” known as systematic internalisers (SIs) .

Best execution is covered in Article 21 which seeks the best possible result for a client, taking into account costs, price, speed of execution. Its contents closely parallel those originally proposed by the FSA under its CP 154 document published some years ago. Under the Best Execution requirements an investment manager will have to put in place a written explanation of their execution strategy, demonstrate that any given order was executed in line with this policy and that the results achieved were consistent with the expected outcome. Best execution aims to increase transparency in terms of pre and post-trade disclosure of trades while encouraging buy-side traders to use a variety of directly competing execution venues (including but not limited to regulated exchanges) in an effort to lower trading costs.

All investment firms, investment service providers and pension funds will be affected by the changes to some extent either directly or indirectly.


How GSCS can help you

GSCS is a specialist in post-trade transaction costs and has been since 1995. We are independent, not part of any brokerage and therefore have no conflicts of interest. We are small but highly focused company which allows us to respond quickly the specific needs of our clients, mostly investment management companies and pension funds.

Our on line reporting tool (itero) helps clients meet the requirements of MiFID in a number of ways. Firstly it allows investment managers to generate reports (whether at a summary or detail level) based on the execution strategy that they applied to particular trades. If the execution strategy includes program trades that may have a maximum value for each trade and a short list of approved executing brokers, then reports can be run to confirm that these constraints have been complied with.

Second once implemented, itero builds up a database of all transactions, measured against multiple benchmarks. As a result before MiFID is implemented traders and compliance personnel will already have a good basis for estimating the likely costs of each of the strategies that they may incorporate into their execution policy. This can form the basis of comparison both in setting the policy (i.e. which benchmarks are most appropriate) and measuring the actual outcome of future trades.

itero is extremely flexible and easy to use. It allows all departments, whether trading, compliance, marketing or senior management of the company to access the data. In addition the size and focus of GSCS allows us to offer significant levels of custom reporting specifically tailored to the needs of our individual clients. As an example GSCS is one of the first companies to offer a breakdown of execution and research commission as required by the FSA and also produces an array of monthly summary reports and reviews for different clients.

Most importantly in an environment where multiple asset classes are involved, GSCS is the only transaction cost analysis vendor to provide a sophisticated and comprehensive fixed income service and will be the first to introduce derivative and commodity trading analysis later in 2006.