MiFID (Markets in Financial Instruments Directive) brings the widest reform of front office regulation to date, bringing the biggest technology challenge that the front office has seen since the introduction of electronic trading. Requirements for ‘best execution’ and increased pre- and post-trade transparency will require firms to perform a fundamental review of their order management, trade execution and market data solutions. These challenges are exacerbated by the short timescales and the fragmented and diverse technologies typically in place in most bank’s and broker’s front offices. This fragmentation is driven by the complexities of offering trading services in an ever-growing variety of different asset classes, across retail and wholesale markets in multiple geographies with different regulatory and tax requirements.
Furthermore, with the advent of standardised protocols such as FIX, there are fewer technical barriers to plugging-in new supplier solutions quickly to meet time to market demands of the business, driving further fragmentation.
For most firms, MiFID requires changes across a complicated set of in-house and supplier solutions for different markets with complex interfaces and dependencies. The few organisations that have invested in strategic front office technology platforms will have a simpler path to MiFID compliance as they have fewer suppliers and fewer systems requiring change.
The supplier squeeze
Although there are a large number of financial institutions across Europe, the number of systems suppliers is relatively small and this number has been further reduced through consolidation and concentration over recent years. Next year, each of these suppliers will receive a large number of functional change requests from their customers to implement MiFID. Though there will be some common requirements there will undoubtedly be some degree of bespoke requirement expressed by each customer. Managing consultation across their customer base is not something that the suppliers tend to undertake on a proactive basis. Instead, commercial pressures lead them to wait until the customer has defined their requirements before they start work. Most suppliers also follow a fixed upgrade release schedule which may not suit their customers who have failed to define their requirements early enough to allow for implementation prior to the April 2007 deadline.
The answer to this problem is for organisations to engage their suppliers and internal IT well in advance and plan their implementation approach. The challenge to this is that the detail of MiFID implementation is still not finalised. Employing an approach that enables early supplier engagement before the final MiFID rules are defined will allow firms to avoid the supplier squeeze.
Engage early to succeed
Assuming that an organisation is already engaged in MiFID at the regulatory and compliance level, there are five key activities that should already be underway to ensure a successful technology response:
- Review the business and technical change programmes planned for 2006. MiFID should be viewed in context with the other key drivers for change
- Review MiFID requirements and assess potential impacts on each system. By identifying different scenarios for each system, the best and worst possible impact can be understood. This will allow the scale of the MiFID implementation to be sized to some extent
- Engage both existing and potential new suppliers and the internal IT department to develop a common understanding of both MiFID and the wider planned programme of change. In particular, review any new MiFID related services being planned by other market participants and service providers
- Perform a technical and business risk analysis and identify mitigating actions should the worst happen and firms find their suppliers unable to respond satisfactorily
- Agree a basis for closer working on MiFID with regular supplier meetings until the final requirements are clarified and work can be planned in detail.
MiFID undoubtedly presents considerable challenges but with a carefully managed approach these challenges can be overcome. Ensuring there are teams within the firm tasked with pro-active management of the IT impact will avoid the MiFID supplier squeeze.
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