Is your organisation ready for the new regulation planned in Europe?
The new European Union directive, MiFID (Markets in Financial Instruments Directive), is planned to come into effect in November 2007. The aim of the directive is to increase transparency across Europe and create a single securities market. MiFID will apply to any firm providing financial services in the combined European Union/European Economic Area (EU/EEA) region plus the 2007/2008 EU accession states of Bulgaria and Romania. In addition to regulated (exchanges), unregulated (MTFs) and sell-side organisations, buy-side firms also fall into the net of the directive as they too have a responsibility to their investors.
MiFID will force firms to examine their corporate governance and other business practice, and also provides organisations with proactive forward-thinking leadership the opportunity to implement innovative business models. A number of financial institutions have already undertaken a similar exercise in response to the US Securities and Exchange Commissions Regulation -National Market System (REG-NMS), which is planned to come into force by the end of June 2006; any lessons learnt should therefore result in a smoother transition with the equivalent parts of their MiFID programme.
There is of course a technology element to MiFID, as firms will need to provide evidence that they have achieved 'best execution' for their clients. Realistically, the only way to ensure that one has achieved this and met the directives requirement of market transparency is by the use of industry standards. It was apparent that the use of existing industry standards and market conventions may be a key determinant to the success of MiFID. This was the primary driver for the creation of the MiFID Reference Data Subject Group, which was formed by the four major industry associations - FIX Protocol Ltd, ISITC Europe, the Reference Data User Group (RDUG) and SIIA/FISD - in June 2005.
The Reference Data Subject Group, chaired by Anthony Kirby, immediately identified its deliverable, that being to write a discussion paper titled 'The Implications for Reference Data under the Markets in Financial Instrument Directive'. The aim of the publication is to examine the processes within the trade lifecycle and evaluate how instruments and parties are identified and provide recommendations as to the terms needed to support the directive's requirements.
The paper seeks to address the subjects identified by the Committee of European Securities Regulators Technical Task Force (CESR/TTF), namely the identification of financial instruments, investment firms, and trading venues. The publication is broken down into two discrete sections, 'Unique (Unambiguous) Instrument Identification' and 'Business Entity Identification'. It also includes an annex that examines the industry messages standards and the terms coverage supported by each.
Soon after the creation of the working group it became apparent that the directive would include the majority of financial instruments, not just equity-based or exchange-traded products as originally perceived. To assist in the identification of scope, the MiFID working group created a hierarchical product breakdown structure of instruments based on ISO standard 10962, Classification of Financial Instruments (CFI). The structure identified eight main groups, seven sub-groups and over 100 individual product types.
The ISO 10962 standard defines the properties of a financial product, so it can be used to assist in unambiguous identification of an instrument. For example, the distribution policy attribute can be used to distinguish an investment fund (profits reinvested into the fund) from an income fund (with profits being distributed to its bearer). Under certain circumstances, both may share the same International Securities Identification Numbering system (ISIN) number.
To unambiguously identify an instrument the group recommends the adoption of ISO 10383 MIC (Market Identification Code) to identify Place of Listing (POL), Place of Trade (POT), and Place of Quote (POQ) for both instrument and venue identification. When these codings are combined with the Local Market Identifier and ISIN it is possible to uniquely identify an instrument.
The paper recommends 'to press ahead with the development and subsequent adoption of the ISO 16372 IBEI standard, including (if necessary) an interim BEI solution'. It is believed that the use of the existing ISO standard, 9362: Bank identifier codes (BIC) is not a workable solution as there is not always a one-to-one relationship between entities and BICs: some firms use one BIC to cover multiple entities, and others assign more than one BIC to the same entity.
Proposed ISO 16372 IBEI
The need to agree a mechanism to identify unregulated markets and systematic internalisers (algorithmic trading facilities/internal orderbooks) was identified. To support this requirement the use of the MIC and the business entity identifier has been debated.
The publication also encourages the use of ISO 10962 CFI (Classification of Financial Instrument) codes for the classification of instruments where there is uncertainty regarding instrument coding or precise type.
Finally, many organisations may wish to examine the use of reference data terms by industry message standards. Realistically, in the majority of cases it will be impractical to use industry message standards as is, as there is always a risk in aligning to a standard over which the organisation has no direct control (in terms of scope and rollout schedule). Therefore, some may consider that using the terms and relationship of terms defined by an industry standard is a viable alternative. Table 1 shows the key reference terms identified by the MiFID Reference Data Standards Group.
Table 1 - Reference data terms supported by industry standards
| Identifier | Term | MDDL | FIX | ISO 19312* | ISO 15022 & ISO20022* |
| Instrument | ISIN (ISO 6166) | Yes | Yes | Yes | Yes |
| Local market identifier | Multiple | Yes | Multiple | Yes | |
| CFI (ISO 10962) | Yes | Yes | Yes | Yes | |
| Official place of listing | Yes | Yes | Yes | Yes | |
| Place of quote | No | Change required for MiFID | No | No | |
| Place of trade | Yes | Yes | Yes | Yes | |
| Place of settlement | Change required for MiFID | Yes | Not within scope | Yes | |
| Business Entity | IBEI, BEI | Yes | Change required for MiFID | Not within scope | Yes |
| BIC (ISO 9362) | Yes | Yes | Not within scope | Yes |
*Terms are provisionally registered pending ISO approval.
Without the use of industry standards, it's difficult to see how the MiFID best execution requirements can be adhered to. This is a real opportunity for the financial sector to appreciate the importance of industry standards, and will provide a platform for innovative businesses to take advantage of a single European securities market.
