www.sii.org.uk

MiFID Presentation for Securities & Investment Institute

Christopher Bond MSI Senior Adviser

1 November 2007

Part 1 – A Retrospective View

Part 3 – Possible Economic Consequences

Part 2 – Some Work-in-progress

MiFID

Part 1 – A Retrospective View

MiFID

The QuestionHow Big is MiFID?

The Financial Services and Markets Act 2000 (“N2”) and largely new rules?

The Financial Services Act 1986 and LSE ownership changes (“The Big Bang”)?

The Closing of the LSE Floor and market maker screen dealing?

The Consolidation of Exchanges including NYSE Euroclear?

The rise of Hedge Funds and Private Equity?

Looking back... 27 Countries have created a single EU Market for

investments Similar Conduct of Business Rules in all countries Exchanges have lost their monopoly and new trading

markets will emerge After sticky start, many larger financial companies

have accepted and largely welcomed the changes FSA has introduced More Principles-based

Regulation and T and C changes at the same time.

But...

Many EU countries will be late implementing. Some Countries and many smaller firms are

unprepared for the changes Wholesale business is more regulated It’s been very costly (in money and sleep) Doubts remain about increase in procedures and

record-keeping Some new electronic markets are starting slowly Will other EEA countries apply MiFID in practice?

Part 2 - Some Work-in-Progress

MiFID

Looking Forward...(The EU Dimension)

Will the FSA expect firms to be ready on 1 November?

What happens with late-implementing countries?

Whose Conduct of Business Rules apply to Branches services in third countries?

Transaction Reporting Unknowns.

Best Execution (illiquid instruments/training/consent to OTC Dealing/scope of policy)

Categorization of Buy-side by Sell-side Firms New Inducements Rule (providers and

distributors/disclosures/introducers) Client litigation Managing conflicts of interest

And not forgetting corporate governance...

Looking Forward...(The UK Dimension)

MiFID

Part 3 - Economic Impact

So how will MiFID change the Markets?

New style markets( Multilateral Trading Facilities and Systematic

Internalizers) put on equal footing to traditional exchanges Emergence of new liquidity pools (Project Turquoise, Chi-x etc) McCreevy’s drive to reduce cross-border trading costs New transaction reporting competition (LSE and Project BOAT) Link to ECB’s eurosecurities settlements system initiative (SEPA) Link to EU Commission’s Review of distribution of UCITS and alternative

funds Exchange consolidation and separation of clearing from trading

BUT...

how much is due to technology change eg smart order routing?

Markets

Exchanges

The end of the Concentration Rule

Separation from Transaction

reporting (and sale of data)

Publication of Pre-Trade and Post-Trade equity

prices

Multilateral Trading Facilities and Systematic

Internalisers

Markets - Example Yesterday

There is a Client Order for a UK equity Currently main markets are LSE and Plus Markets The firm can choose which to use

Today

The firm’s Execution Policy will review these markets and electronic order matching systems e.g. Chi-x, and, if traded outside UK, at other exchanges and markets

So how can Firms adapt their Business Strategies?

Start/Increase cross-border services

Move/Focus on areas of strength e.g. execution-only → Advisory Services → Discretionary Management

Become a market maker or MTF

Sell your price data

Use regulatory arbitrage eg categorization of clients

So how can Firms adapt their Business Strategies?

(Reduce Costs)

Commoditize international products

Become a market maker, systematic internalizer or Multilateral Trading Facility

Join a network to share costs, or even merge?

The Challenge and Opportunity of MiFID

The clear cost of implementation of MiFID will only prove justified if firms take the opportunities generated to raise revenues.

John Tiner, Chief Executive of the FSA - May 2007

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And the next big things?

ICAAP under Pillar 2

Disclosures under Pillar 3

The Retail Distribution Review