MIFID in Asia: How Europe’s Biggest Regulatory Change in Years Will Affect Asia

One of the 42 directives of the European Commission’s Financial Services Action Plan (FSAP), the Markets in Financial Instruments Directive (MiFID) came into force on November 1, 2007 (after 2 official delays) when it will replace the Directive. Investment Services (ISD) existing.

Sometimes called ISD2, this next-generation policy will attempt to address European financial services regulations by aligning them with the rapidly evolving global financial industry and streamlining the European market.

Simply put, MiFID will allow European financial institutions to provide services anywhere in Europe. It will also allow shares to be traded ‘off the books’ between eligible entities that bypass exchanges.

But how will this affect Asia? For Asian companies that focus solely on Asia, there will be little, if any, impact at all. It is the international firms that have an Asian presence where the effect will be most felt. For example, according to article 21 of the MiFID, ‘Best Execution’ is a fundamental element in the protection of the client and entails more than obtaining the best price for the client.

Companies will be required to provide information on the different means of execution and the reasons why the company uses these means. In addition, companies must be aware of how quickly, if the order will be executed and settled, the size of the order and any other strange circumstances that affect the best execution.

For client orders that are retail in nature, the best execution is largely determined by the brokerage and as such details of the costs directly involved in the execution should be disclosed, such as the execution source fees, settlement and clearing fees and other third party fees. Of course, all of this will need to be monitored to verify compliance and proactively improve operational inefficiencies. Additionally, MiFID requires that a company be able to demonstrate best execution compliance for up to 5 years. This means storage of records and systems to manage them. Asian operations will need to spend money on technology and expertise just to meet the best execution requirement.

MiFID is also introducing a new three-level customer classification system. Clients will be classified as eligible retailers, professionals, or counterparties. Think of the Asia-based company soliciting European clients. This firm will have an office in Europe, governed by MiFID, and under the three-level requirement it must classify these clients accordingly. However, the local jurisdiction’s customer classification policy may be completely different. These regulatory inconsistencies must be managed.

There are other considerations, such as updating current trade policy and customer account agreements. Each existing customer must sign this new documentation. However, non-compliance. What will be the penalty?

How can financial companies in Asia prepare for MiFID? If they have not already done so, they should discuss with their European counterparts how their operations will be affected. If customers are truly affected, companies should act to assess any information they are required to provide or obtain from their customers before November 1, 2007. Additionally, if services provided in Asia will be affected, they should discuss with their European counterparts a Work around the solution and update your procedures accordingly.

Now that the Markets in Financial Instruments Directive comes into force, has the European Commission’s Financial Services Action Plan taken the lead with its 24-year revision of the Investment Services Directive and modernization of its financial industry? ? Will it really benefit the end customer and bring efficiency to the European financial industry? Or will it impede business in other areas such as Asia and isolate Europe as Sarbanes-Oxley did the United States? Time will tell.