EU keeps markets guessing

A new, more flexible lawmaking procedure for financial services regulation in the EU is currently being tested with MiFID, the law that will revamp the way in which investment banks and stockbrokers work.

So far the result is that more and more companies are investing to prepare for legislation which has not yet been finalised and could suffer more delays.

MiFID - the Markets in Financial Instruments Directive - is the first real law to be realised under the 'Lamfalussy' legislative procedure, introduced in 2001 and intended to speed up the regulatory process for financial services law and thereby respond more effectively to changes in the financial markets.

MiFID's main aim is to harmonise the way in which financial institutions trade shares, bonds and other money-generating instruments so that they can do so seamlessly anywhere in Europe.

It also strengthens client rights, forcing institutions to ensure that they offer the best deal, known as 'best execution'. And it regulates the way in which firms trade outside the open stock market - a procedure known as internalisation that is openly carried out in some member states but more covertly in others.

EU finance ministers approved a framework law in April 2004. A committee within the European Commission was then charged with hammering out the technical details, subject to a non-binding review by MEPs, before the entire law comes into force in November 2007.

Last week (21 March), MEPs began their review of the Commission's efforts to put more flesh on MiFID's bones with 'implementing measures' as they are known, that were published in February. A final vote is expected in one of the summer plenary sessions.

Although the MEP drafting the Parliament's report, Finnish centre-right MEP Pia-Noora Kauppi, has avoided any real controversy, such as the definition of off-market trading or market liquidity, she is still pushing for some key changes.

One is to exempt large share trades known as 'blocks' from MiFID's transparency rules. Under the current terms of MiFID, investment houses will have to publish the prices and size of all trades within three minutes, which some feel will threaten the market.

"There should be some flexibility, as it is not always good for liquidity if for example the market is aware that someone suddenly owns _2 billion in Nokia shares," Kauppi said. "The issue is also important for government-owned shares."

Kauppi is likely to be successful on this point, as insiders say that the Council of Ministers has already decided that this will be one of its concessions. But while changes like this will be welcomed by industry, they will also pose problems, since the industry cannot properly prepare for them.

"When there is no final shape to the directive it's difficult to know exactly what to implement," said Guido Ravoet, secretary-general of the European Banking Federation.

Added to this uncertainty, there are tensions between the EU institutions over their relative legislative powers. The Parliament has been jealous of its right to review such implementing measures, which would have been enshrined in the now moribund EU constitution. The Austrian presidency has proposed a solution, but two financial laws were recently held hostage over the issue and in the initial exchange of views on Kauppi's report one MEP raised the matter again.

Kauppi said that she hoped that the dispute would not delay proceedings. "When the Parliament and the Council are so close on the substance, we should not allow this kind of power play to disturb the process too much," she said.

If it does, the November 2007 deadline, which has already been pushed back twice, could shift again.

Some observers think more delays are in any case inevitable. "I wouldn't be surprised to see the November deadline move again, as I don't see member states rushing to comply," said one banking source close to the issue. He said that although the EU Internal Market Commissioner Charlie McCreevy kept talking about a 'first mover advantage', "from where I'm sitting it looks like a real disadvantage to be the first to implement such a strict regime".

Although larger companies have been preparing for MiFID since the law was first proposed in 2002, others are only just now waking up to its potential impact. A tidal wave of opposition is growing, say some officials, particularly in the UK where the financial services industry is most highly developed.

Most important is the cost issue. Being able to search prices on other markets, publishing all trade details and keeping the data for at least five years requires significant investment, which analysts estimate at anywhere between _5 million and _50 million for any one firm.

"Companies are now working on their 2007 budget, which is why we are currently seeing such a wave of panic from the banking sector over MiFID compliance," says one industry observer.

Some think that the cost will eventually change the face of the industry entirely. Some big firms like Merrill Lynch and Citigroup have already adapted their strategy and developed their own exchange platforms so that they become a trading venue and are therefore subject to less stringent rules than investment houses when trading off-book.

"There will be existing players that cannot cope with the changes and carry on as they did before," says Geert Vanderbeke, executive director, European sales, for brokerage, clearing and custody at Fortis. "We are therefore going to see a split between those firms that will switch to providing 'best-execution packages', those that will concentrate on their client base and those that will start up as an execution venue."

Given the upheaval, it is not surprising that national governments are reluctant to force industry to comply.

But according to Ravoet, more delays are the last thing the sector needs. "Our message is that the lawmakers should get on with it now," he said. "The industry needs to know where it stands."

Major analysis feature in which the author suggests that proposed rules governing financial markets could be held up by an inter-institutional battle. MiFID - the Markets in Financial Instruments Directive - was the first real law to be realised under the 'Lamfalussy' legislative procedure, introduced in 2001 and intended to speed up the regulatory process for financial services law and thereby respond more effectively to changes in the financial markets. MiFID's main aim was to harmonise the way in which financial institutions trade shares, bonds and other money-generating instruments so that they could do so seamlessly anywhere in the European Union.

European Commission: DG Internal Market and Services: Financial Services: Securities and Investment Funds: Investment services and regulated markets http://ec.europa.eu/comm/internal_market/securities/isd/index_en.htm

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