The Buy Side's MiFID Mission

The last year was filled with hype surrounding the Markets in Financial Instruments Directive (MiFID), coming to a financial services firm near you on November 1. Industry insiders have described it as a threat, a pain, and a headache, and the UK's Financial Services Authority (FSA) estimates that UK firms will spend £1 billion ($1.94 billion) implementing the directive.

However, not everything MiFID-related is so gloomy. Sell-side firms increasingly see MiFID as a means for gaining a competitive advantage. Recent examples of this include the birth of Projects Boat and Turquoise. Nine global securities firms have joined together to form Project Boat, a trade data and market data dissemination platform that exploits new MiFID rules on market transparency. Project Turquoise involves seven of the same nine banks, which aim to create a pan-European equities trading platform in the form of a new multilateral trading facility (MTF), to compete with the traditional national exchanges across the European Union.

But what about the buy side? "Many buy-side firms initially believed MiFID to be predominantly a sell-side issue," says Clare Vincent-Silk, a consultant for investment management consultancy Investit. The consultancy has held a number of workshops for their investment management clients on the impacts of MiFID and has produced a do-it-yourself handbook, entitled The MiFID Toolkit, which explains how fund managers and other buy-side firms can assess what they need to do. As November 1 draws closer, however, Vincent-Silk says that more and more firms are getting into gear.

Ten out of 45 employees at Martin Currie, an investment management firm with £12 billion ($22.5 billion) under management, are currently involved in MiFID-related projects, according to program manager George Quilter. He says this number is set to rise in the near future. Martin Currie has set aside a separate MiFID budget, but Quilter says that "a number of MiFID requirements dovetail into existing planned projects and therefore some budget is held 'external' to our MiFID projects." The UK-based firm is also planning some upgrades to its IT systems but these "were already planned activity and are not therefore solely due to MiFID," says Quilter.

Northern Trust, a global investment firm with $667 billion in assets under management, has an entire business unit dedicated to MiFID compliance, according to Friedrich Burian, senior vice president at the US-headquartered firm. "We are very concerned about MiFID," he says. "There are 24 ongoing MiFID projects under way within the organization. We are dealing first with the most obvious issues that present themselves as soft spots," he says.

Vincent-Silk says there are three main areas that buy-side firms must address when preparing for compliance in November: client categorization, compliance policy amendments and best-execution practices and policies. Asset managers will need to review their client classifications, and, she says, it is likely that more clients will now be reclassified as retail clients. MiFID aims to create greater protections for retail customers and some buy-side firms might not have business processes in place to support retail clients. Burian says this issue is particularly important as clients can choose how they want to be classified.

Firms will soon face many new obligations to achieve and prove best execution, a difficult concept to define, as it will mean different things to different firms, depending on the size and scope of their operations. According to consultancy Celent CEO and founder Octavio Marenzi, this vagueness has been an issue for some, as previous regulations have been more straightforward. For past regulations, "there has been a cookbook on how to implement them, but MiFID is more vague, more open to interpretation," he says. Many firms are still waiting for clarification from the FSA on certain points, but Marenzi says that none will come.

The FSA was unavailable for comment at press time.

Burian says he is confident that Northern Trust will be fully MiFID-compliant when the directive takes effect. "Compared to our peers, we are ahead in terms of knowing what we need to do," he says. "Some are more ready than others. It depends on whether they know the scope and if they have done a gap analysis."

Quilter of Martin Currie says that some investment management firms have been slow to get started on MiFID compliance. "Few firms have started their MiFID projects, though a number have been carrying out a gap analysis, as far as is currently possible. Others have still to start," he says.

A proactive approach does not appear to be the norm, according to information gathered at a recent forum run by Investit. At the forum were 25 attendees representing nine investment management firms, one asset servicing company and the Investment Management Association (IMA). According to Investit, eight out of the nine investment management firms attending did not have a separate MiFID budget and in many cases, a single program manager was the only dedicated resource.

"Many buy-side firms are asleep at the wheel" when it comes to MiFID, Marenzi says. There is a lot of ignorance and confusion as to what MiFID will mean, and many firms are "sticking their heads in the sand," he says. "Sometimes the reaction to a big problem is just to give up and say it's too hard." Marenzi says that MiFID will change the way trading takes place and that buy-side firms should be very concerned.

Larger buy-side firms are better-equipped to deal with MiFID because they are more able to see the bigger picture and have more resources available to dedicate to MiFID projects, Marenzi says. "Smaller firms just don't have the vision or the resources," he says.

Burian says larger firms find it easier to absorb the financial costs of MiFID compliance.

The bureaucracy does have an upside. "It will definitely involve cost, but it will be manageable and worth it, as it provides an opportunity to review our corporate governance and do things that we might not otherwise find the time to do," says Burian. Quilter says MiFID is an opportunity to improve the service offered to clients. "In some cases, we are taking the opportunity to improve our systems and processes beyond what is required to comply with MiFID," he says.

The main benefit that MiFID will bring for those buy-side firms that are ready for it will be the positive effect it has on a firm's reputation, says Marenzi. He says that appearing to be on the ball will give firms an edge over the competition, whereas it could be damaging to a firm's image to seem ill-prepared.

As for those unprepared firms, Marenzi says the regulators will have to be lenient in the beginning, as he says a large number of firms will fail to be compliant in time to meet the deadline. He predicts that fines for non-compliance will be handed out after about six months.