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The Market in Financial Instrument Directive (MiFID), a far-reaching piece of European legislation, is aimed at creating a unified European capital market and providing strong protection for investors.
Everyone in the financial community offering investment services in
Europe must conform to the MiFID provisions as enacted by the governing regulator.
The effects of this change will be felt in many areas, including:
- Customer protection
- Market transparency
- Market liquidity
- Competitive landscape
- Order management and execution
Of the new requirements, ILOG's Business Rule Management System (BRMS) is especially helpful in the following areas:
- Client classification
The classification of clients into the categories of retail, professional and eligible counter party is not just administrative,
but an essential first step to the provision of customer protection and best execution. It is an activity requiring continuous monitoring and testing,
and it will be an essential part of the reporting requirement.
- Suitability and appropriateness tests
These tests require financial firms to ensure the services they offer are suitable and appropriate for a client,
before accepting an execution order or proposing an investment service. To properly carry out these tests, financial firms will have to examine a wide range of factors,
including the client's classification, financial situation, investment objectives and level of experience.
Rules governing these tests will be complex, and as firms target new customers or offer new services, there will be a need for frequent updates.
- Best Execution
Under MiFID, financial firms will have to get the best possible deals for their clients; taking price, cost, speed,
likelihood of execution and settlement, size and the nature of the order into consideration. This process will involve ensuring the best possible
venue is selected to execute the order. A wide range of factors, including liquidity, fees and commissions,
types of market participants, client preferences, trading and settlement capabilities, will have to be considered.
As the market develops under these new regulations, execution venues will appear and disappear and rules governing those policies will have to be reviewed frequently,
redefined or supplemented. MiFID also requires that these rules be transparent and fully auditable to ensure the firm's best execution policy has been
achieved for every transaction.
Next Steps
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