In which activity are Romania, Ireland and the UK current leaders in Europe, and Italy and Spain are bottom of the league? If you have been following the financial press coverage, you will not doubt have quickly answered MiFID transposition (the copying
of the MiFID directives into a states local law). Okay, not really an Olympic sport, although some crueller commenters may say it will not be before 2012 that certain EU member states will perfect this particular game.
So what - I hear you cry. European legislation is always slow to roll out, but what does it mean for individual firms? What are the opportunities and dangers?
Well as so often, the problems are hidden in the complicated but important detail. Take something as apparently simple as transaction reporting for example. Most Buy Side firms rely on their Sell Side counterpart to transaction report. However, where that
counterpart is in a country that has yet to transpose and won't have done so by 1st November (e.g. probably Spain, Italy, or Greece) the local Sell Side broker cannot make a MiFID compliant transaction report. This is quite simply because the MiFID transaction
reporting format will not have been defined by their local regulator. So how is the Buy Side in a transposed state such as the UK to maintain their full MiFID compliance? One possibility is for the Buy Side to go through a UK broker (who paradoxically must
not have a branch office in the non-transposed country - so as to avoid home-host issues) who can transaction report this trade through the FSA. So to be MiFID compliant, should the Buy Side use a Sell Side in a transposed country to route and transaction
report its trades?
Also exchanges in non-transposed states may find the liquidity for their "domestic" stocks moving rapidly to the new MiFID pan-european venues e.g. Turquoise or Equiduct. Perhaps, the LSE will list the stocks from its new bed fellow the Borsa Italiana to
allow MiFID compliant trading that would otherwise have to wait for the Italian state to transpose.
I don't expect that any of these detailed issues will lead to the "meltdown" of any particular market or sector, as some pessimists predict - much depends on how firmly and quickly the new rules are enforced - but individual firms need to understand the
particularly relevant details for them if they are not (to return to our sporting analogy) to be forced down into the EU financial services equivalent of the Second Division!
[a version of this blog first appeared in the
MPIE Financial Sector Bulletin]