Albinus: Much ado about Mifid

Perhaps it is time for Markets in Financial Instruments Directive (Mifid) to take a bow and exit the stage. By Phil Albinus

For the past three years, European investment firms have been hearing the drum beat of Mifid, the vaunted and celebrated series of regulations that aim to provide transparency to all financial transactions inside the European market.

On paper it appears to be a noble move – greater transparency in an age that not only demands it, but should also be in a position to deliver it. But let us not forget that it was the brainchild of the European Union (EU). Ah, the EU – the same collection of nations that cannot ratify a constitution or convince the UK to adopt its thoroughly boring and lacklustre new currency, is supposed to deliver transparency?

The Mifid stage play is following the same steps as other large-scale IT projects performed on Wall Street, the City and beyond. It starts out with grand ideas, followed by dire warnings of fines and loss of reputation in the second act, and then it all falls apart in the closing scenes.

We have seen this one somewhere before; Macbeth arguably had a better political career compared to the chances of Mifid seeing the light of day. Sure, the EU may introduce something resembling Mifid in the future, but the final version of the directive will not look like its original design.

Let us look at the script. First, the Mifid guidelines, according to more than one industry observer, are vague and over-reaching at best. Firms looking to avoid penalties for breaking the speed limit must know what the speed limit is. One apocryphal story has a regulator sitting down at a Mifid meeting and telling those at the table: "I retire in three years – what the hell is this Mifid?" Not an auspicious start, I'm afraid.

With this uncertainty, you could assume that firms would over compensate to make sure that they are compliant with the law once it comes into effect on November 1 this year. Don't count on it, says another industry observer. Mifid will require an overhaul of back-office systems and infrastructures, and that is not even on the radar for most firms.

Buy-side firms, notoriously cash strapped for IT dollars compared to their sell-side brethren, are doing little on Mifid, according to the observers and consultants. (To be fair, buy-side firms will state that they are on target for Mifid compliance, and I can attest that the gutters on my home are clean, the garage door will be painted this weekend, and my anti-virus software is up to date).

The second act includes the dire warnings from consultants who say that firms must get ready or else. Right now, we are hearing about Projects Boat and Turquoise, which are rumoured to take on the various aspects of Mifid, although interestingly, no-one on these secret committees is speaking to the press. Hmmm...

With the final act nearing, the spectre of fines looms. But a growing number of observers on both sides of the industry expect Mifid to fizzle out and simply fade away. How can this be possible? According to the critics, 'the people' demand regulation and transparency and no buy-side firm will walk away from their Mifid investments.

Oh really? Look at some spectacular projects that have faded away. Look no further, for example, than Project Taurus, the London Stock Exchange's plan for a paperless share settlement system. It took more than 10 years of investment and its budget of roughly £6 million swelled to a reported £400 million. After 11 years and an estimated 132 times growth in the budget, there is still no system in place.

For further proof, need we mention the race for T+1, which fizzled out in the wake of September 11? The industry gave up on T+1 because it was still recovering from the after-effects of the attacks and also the looming WorldCom and Enron scandals.

Perhaps it is time for the regulators to close down the Mifid show and move onto the next play. >