Hexaware Technologies

MiFID is being adopted using a legislative approach known as the "Lamfalussy Process." This is a four level approach that starts with European Union directives issued by the European Council, followed by a more detailed technical guidance that constitutes the second level. The third level is the facilitation of coherent implementation and uniform application of EU legislation by the Member States. Primarily estimated, the directive will cost investment banks up to £22 Mn - with half of that spend going to technologies including workflow; networking; routing; and data warehousing. MiFID replaces and broadens the scope of the current compliance, Investment Services Directive (ISD), which came into effect from 1993.

The compliance deadline for MiFID has been extended to 1 November 2007, under the auspices of the UK presidency of the European Council.

MIFID BENEFITS

	Wider Scope
		Instruments: Includes Commodity derivatives; Credit derivatives, Contracts for Differences
		Services: Widens the range of ‘core’ investment services
	Greater Degree of Harmonization
		More detailed requirements for the conduct of business of investment firms as well as how to operate regulated markets and MTFs.
	Enhance Transparency
		Introduces new pre- and post-trade transparency requirements for equity markets.
		Creates new regime for ‘systematic internalizes’
	Facilitate Cross-Border Business
		Improves the ‘passport’ and clarifies some of the jurisdictional uncertainties that arose under ISD.
	Best Execution
		Enforce greater competition will better level of service

MIFID IMPLICATIONS
MiFID has implications on various areas like pre-trade & post-trade transparency, best execution, order routing, record keeping, etc. These implication has can be categorized into three parts namely trading, investor, and operations & data management. These implications have impact on business, as well as, technology needs within an organization.

Trading
	Pre-trade Transparency MiFID introduces comprehensive rules on the information that must be published before shares are traded on regulated markets, on multilateral trading facilities or by systematic internalisers. It also obliges an investment firm that is a systematic internaliser to undertake a public market-making obligation.

	Post – trade Transparency Regulated markets currently have to follow strict post-trade transparency rules for share trading. MiFID will extend those rules to multilateral trading facilities and investment firms trading outside regulated markets and multilateral trading facilities. Under these rules, the venue, time, volume and price of share trades must be published to the market as close to real-time as possible as and in any event not longer than three minutes from the time of the trade.

	Best Execution MiFID requires that investment firms ensure that they take all reasonable steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement size.	Order Handling Financial intermediaries must execute client orders promptly and fairly. They must set up procedures to ensure that orders received through the same channels are treated sequentially.
Investor
	Knowledge of Client The way in which clients are classified under MiFID is different from current classification regimes and the regulations apply differently to each client class. Clients are grouped into three categories, each with a different level of sophistication: eligible counterparties being the most sophisticated followed by professional investors and then retail investors.

	Information Disclosure New formal disclosure requirements will be introduced, including the firm’s conflicts of interest policy, best execution policy, and how it holds client assets. All information from an investment firm like its name, service offerings, financial instruments & proposed strategies, execution venues, cost & associated charges, etc should be fair, clear and not misleading to the clients or potential clients.
Operation & Data Management
	Transaction Reporting Presently under ISD, debt and equity traders have to report their transactions to the competent national regulatory authority of the regulated market where the transactions take place. All transactions must be reported to the competent authority no later than close of business the following day.	Record Keeping The customers of investment firms must receive adequate information and reporting on transactions in a clearly comprehensible form, including details of costs. Confirmations must be provided within one business day of the transaction with the exception of regular investment schemes. Firms must maintain transaction data in durable medium for at least five years and also divulge daily, details of transactions on regulated markets to the relevant authority, by close of the following business day.
	Conduct of Business The starting point for many of the conduct of business rules is the client classification which is common throughout Europe. There are different levels of protection to each of the three categories in the regime - retail client, professional client and eligible counterparty. MiFID requires firms to act in the best interests of clients. More specifically, a firm must maintain and operate in accordance with a written ‘conflict of interest policy’, effective operational and administrative arrangements with a view to taking all reasonable steps to prevent a conflict from adversely affecting the interests of its clients.
APPROACH TO MIFID
	Hexaware suggests a four-phase methodology for providing MiFID compliance solutions to financial Institutions. These four phases are: Consulting, Constructing & Testing, Auditing, and IT Governance. An efficient solution involves:
	Consulting: A good understanding of the requirements surrounding the directive and the fit-gap analysis followed by detailed development plan with milestones.
	Constructing & Testing: Evaluate the impact of requirements on Front office, Middle office and Back office operations. Design & develop solution based on impact evaluation. Test the solution to check whether it is meeting all compliance requirements.
	Auditing: This includes process audit, system audit and compliance audit. Time proven tools and templates should be used that help in scrutinizing the compliance with the business objectives.
	IT Governance: Continuous support & maintenance services to performance improvement and cost cutting.
	CONCLUSION The current time frame for MiFID is 1st November 2007. Timely assessment and planning require broad representation from the business, operations, technology and compliance in order to understand the far reaching impacts of MiFID. As the implementation time is approaching, financial institutions shall start estimating the budgets covering technology and resource needs for 2007 and 2008. Also they need to assess impact on existing projects underway and check whether changes to scope need to be made in order to re-align with the requirements of regulation. Most importantly this allows firms to prioritize & strategize their activities involved in developing MiFID compliance solution. Authored by Cornelius Nandyal, Practice Head, Corporate & Investment Banking corneliusn@hexaware.com