The original Mifid directive

THE original Markets in Financial Instruments Directive (Mifid) was drafted in 2004 and implemented 4 years ago. The directive is up for review. So what were the shortcomings of the original European Commission directive?

One of the core tenets of the original review was to shore up protection for clients that were classed as sophisticated, breaking them up into three broad groups – retail clients, professional clients and eligible counterparties. (See box, left.)

The aim was to give certain parties a looser rein so as to allow them to complete an increased number of trades without being burdened with excessive regulation.

In the original Mifid regulations, municipalities and public authorities were included in the category of eligible counterparties. Given the losses accrued by these parties, and the subsequent pleas of mis-selling, it is expected that we will see a limiting of the availability of the classification of eligible counterparty in certain circumstances.

A second area where some see that the directive failed is in terms of providing guarantees in terms of best execution of trades – at the best price, cost and speed of processing.

It is also felt that it fell down in terms of the transparency of trading because of liquidity fragmentation.

According to a CFA Institute survey, 68 percent felt that liquidity fragmentation has created difficulties in trade reporting obligations. Although it is difficult to measure the degree to which the fragmentation of trading and pricing has been detrimental to price formation, it does form the basis of arguments for a need for a consolidated tape for quote and trade data for European equity markets.

Currently there are multiple trading venues, and users have to increase their connectivity to a much wider range of venues than ever before. With each connection costing around £10,000 per month, that’s a high cost that can mount up.

On the buy-side, the cumulative cost of these fees charged by exchanges and trade reporting services has created a significant barrier to adoption of a consolidated tape and in doing so has diminished overall transparency.