The implementation of the Markets in Financial Instruments Directive (MiFID) is still 412 days away but already all parts of the market are feeling the pressure. Firms are facing possible cuts in earnings, outsourcers could see there contracts threatened, and regulators are having to fight growing scepticism.
This week the analysts at JP Morgan Securities claimed that MiFID could cut earnings at large European commercial and investment banks by as much at 7%. Taking the top eight European wholesale banks, this would wipe €19Bn of their combined values. The analysts also downgraded two banks and reduced share price targets at three other banks. Conversely, ABN AMRO, where MiFID was reported as having less impact, found themselves upgraded. This action by analysts will have many banks looking nervously at their investment gradings and could result in early statements regarding the financial impact of MiFID on their operations.
The requirements that MiFID is imposing on outsourcing, particularly outsourcing outside of the EU, are also drawing concern amongst outsourcing vendors and their clients. "Critical and important" applications need regulatory approval in order that they may be outsourced and, where this outsource provider is located outside of the EU, then the local regulator could be called upon to approve the service. This will cause concern for many Asian-based outsourcing services, and may be the reason why many are reputedly looking at Romania and Bulgaria, scheduled to join the EU in 2007, as possible sites for new outsourcing operations.
Regulators are also finding both the workload and the market reaction to be significant. Last Monday was the closing dates for submitting views on the ways the Committee of European Securities Regulators' should go about implementing the supervisory regime for MiFID. There have been 25 responses from various organisations, mainly banking associations. Not all responses are supportive. The UK regulator, the FSA, has come under fire by putting forward a suggestion that benchmarking was a possible solution for best execution surveillance, which caused Hector Sants, the FSA's MD for Wholesale and Institutional Markets, to write an open letter to the Financial Times stressing that the FSA had no intention to make a rule requiring firms to adopt benchmarking. However, the trade associations have continued to fire arrows into the benchmarking corpse as seen from a recent Futures and Options Association report.
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