Experts: Make Time for Mifid Testing

LONDON-Testing of Mifid-compliant IT systems is not expected to start before September 2007, leaving barely any time to assess and debug applications, according to members of the Mifid Joint Working Group (JWG) IT Subject Group (ITSG).

In the latest ITSG meeting, as it is now being called to distinguish itself from the for-profit organization JWG IT, representatives of several securities firms say that the market is still trying to understand the Markets in Financial Instruments Directive (Mifid) market structure reforms.

Only after the rules have been understood and a strategy put in place will user firms start developing and deploying systems able to cope with the new best execution, pre- and post-trading data and transaction reporting rules. Consequently, some firms will be able to start testing these new programs in the summer of 2007, with most of the others starting in September or later.

Testing is still not a given, though. "How do you do testing side-by-side with normal day trading?" asked a securities firm representative. "You can't get your traders to do their work and test the new systems simultaneously."

However, before firms can look at testing their systems, they will first have to open up to Mifid.

"Mifid will affect 3,000 to 4,000 firms," says a member of the ITSG. "But only 27 seem to be engaged. The rest are behaving like ostriches, hiding their heads in the sand and hoping this will go away. A large number of them are waiting to be told what to do, and it's even hard to find someone to talk to about this within the smaller firms."

On that matter, the JWG IT commercial entity is trying to bring answers to the market. In a breakfast meeting last week, P.J. Di Giammarino presented alongside CMS Cameron McKenna what parts of IT systems would be affected by Mifid.

In the case of client categorization, Di Giammarino warned that securities firms might struggle to find the resources, the time and the money to go through the process of re-classifying every customer. "We have seen estimates that it will cost up to 80 euros per customer to get this done," Di Giammarino says.

Moreover, firms will have to make sure that "their current systems and people will be able to do that. The systems that are running the banks today might not run the bank tomorrow," says Di Giammarino, who also advises banks to get on with testing. "We need to start testing systems in 28 different markets by the end of Q1 2007-if we expect an orderly transition."

Among the challenges that securities firms may face is "new scale requirements that may break current models; more power, more space needs, more availability and less latency," Di Giammarino says. Firms may also need to increase the processing power for increased volumes of data to make his case. Di Giammarino asked the audience if they had "a corporate document management system, and if they could ever find anything that they were looking for within it."

Banks will also have to develop and deploy Mifid-compliant software. However, "you can implement the best software and still not be Mifid-compliant, if you don't have the right hardware, storage and network capabilities."

Di Giammarino also challenges firms to find the right staff to meet their objectives. "Head hunters are already on the move," to place the most competent Mifid experts, he says. Giammarino also warns firms against expecting regulators to help enable or even make sense of Mifid. "In Europe, well over half of the regulators don't even have an IT capability," he says. "Basically, Mifid is a request from 600 million voters to change the way that capital markets conduct business," Di Giammarino says.

Olivier Laurent