Newspaper article The Evening Standard (London, England)

City Must Brace for U-Turn with Mifid 2

Newspaper article The Evening Standard (London, England)

City Must Brace for U-Turn with Mifid 2

Article excerpt

Byline: city comment Anthony Hilton

THE City's big firms have a tried and tested way of dealing with regulatory change. When it is far off, they pretend it does not exist. When it comes closer, they ignore it. When the more alert juniors in the organisation plead with them to pay attention, they fire the upstarts. When the deadline is imminent, they look to see what their competitors are doing, and their competitors look at them.

If they see no sign of activity, they all relax a bit longer. Then when the day finally comes, they panic. It has always been like this and there is no reason to assume it will be different next time. This means that in a year to 18 months from now, there is likely to be chaos. That is when Mifid 2 arrives.

European securities law is currently governed by Mifid 1. In place for well over a decade, it was seen way back when it was implemented as a triumph for the British way of doing things. This has fostered a widespread and cosy assumption among the few who have registered a dim awareness that Mifid 2 will be more of the same but with a few tweaks.

Nothing could be further from the truth. Mifid 2 is a U-turn. It so fundamentally changes the rules round equity trading that it largely reverses Big Bang, the reforms of 1986 which allowed securities houses handling equities to act as both an agent and a principal and to trade on their own account with their own capital. That reform almost 30 years ago ended the system under which firms were either brokers, buying shares on behalf of clients, or jobbers, deploying their own capital to make markets and acting for themselves. It brought to London the American model of the integrated securities house.

People of a certain age, the few of us who are still around, see this as the point where City firms lost their moral compass and started to put their own interests before those of the client an attitude that lies at the heart of many of the scandals since. No matter Mifid 2 seeks to put a stop to that.

Given how fundamental this reform is, you might expect City firms to be in turmoil because those dealing in equities face wrenching change not only to their computer systems but also to their whole business model. The fact that this has gone largely unreported is testament not to a quiet confidence they will easily make the adjustments but rather to their not paying attention, as mentioned earlier. You only panic when you know what is going on.

The scale and nature of the changes are in large part a consequence of the financial crash. Regulators found during the market meltdown that they could not see what was going on because so much equity trading was off-market, in dark pools and not reported anywhere.

So a major element of Mifid 2 is about getting all equity trading back onto recognised exchanges or their equivalents, where it can be seen and reported. …

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