If it turns out as the soothsayers predict, the introduction of the European Union’s Markets in Financial Instruments Directive (MiFID) will bring the most comprehensive changes to Europe’s capital markets arena yet seen. As Ian Warford, industry director for securities and capital markets at Microsoft EMEA, Financial Services, puts it: “MiFID is really like the Big Bang for Europe.”

Ian Warford, capital markets director for Microsoft EMEA, calls MiFID “the Big Bang for Europe.”

The directive, which is scheduled to come into effect on Nov. 1, aims to improve investor protection by introducing greater transparency, while opening up competition for order flow and stimulating cross-border trading. In this way, the European Commission hopes to make its marketplace ultra-competitive with those around the world – read the United States.

Not surprisingly, given the scale of its ambitions, MiFID brings both significant challenges and opportunities for those institutions that fall within its ambit. However, while there had been some early confusion and disgruntlement, Octavio Marenzi, CEO of research and consulting firm Celent, says the level of understanding about the directive in the industry is increasing. And while technology will be the key to participants’ preparedness, according to Marenzi, “MiFID is about retooling rather than new developments,” and there are signs that firms are slowly starting to make the requisite adjustments.

Meanwhile, many technology vendors are busy engineering their products and touting their wares in the run up to the November launch. Microsoft itself has joined the fray. The technology changes MiFID calls for are server rather than desktop-related. Microsoft’s toolset does have relevance, such as using BizTalk to meet the directive’s connectivity requirements, says Marenzi. However, Microsoft’s Warford does acknowledge that there are only limited areas in which it can provide out-of-the-box MiFID solutions. Instead, he says, it is promoting a partnership approach to the situation.

As such, the firm has broken the directive down into eight major areas: planning and testing, client classification, best execution, transaction reporting, market connectivity, trade history and reference data, systematic internalization, and systems integration. The partners – which leverage different aspects of Microsoft technology – then bring their applications to bear for one or more aspects of the MiFID problem.

According to Warford, three of the eight areas Microsoft has identified stand out as particularly important for market participants at the moment: client classification, whereby clients are designated as eligible counterparties, professional clients or retail clients, with varying levels of investor protection; best execution, which will require firms to execute their clients’ trades in accordance with a predefined policy; and transaction reporting, which requires institutions to prove customers receive best execution. And it is here that certain Microsoft technologies can play a key role, either as the raw technology on which customers can build solutions or as the basis for those higher-level applications, he says.

Progress Apama’s Mark Palmer says complex event processing and business activity monitoring can detect whether trading patterns comply with MiFID best execution policies.

“When it comes to client classification, SharePoint can be used as a document management repository, as well as making sure you have the workflow in place to prove to auditors you sent the documentation to the customer and they have agreed to be a professional client, retail customer or a counterparty,” says Warford.

As for transaction reporting, notes Warford, “One of the big issues is that banks typically have many information silos, and you need to integrate the various product silos to provide a single client record for all the different products you’ve traded for that customer. That’s an integration issue, so that’s a BizTalk solution.”

Best execution, meanwhile, can be divided into pre- and post-trade analytics. “When it comes to post-trade analytics, Microsoft SQL Server can store all the real-time trade information with some partner technology, and it can be used to prove you’ve given the customer best execution,” he says.

One of the firms Microsoft has partnered with to meet the challenges of best execution is Progress Apama. Its focus is on complex event processing (CEP) technology, which looks for complex sequences and event streams in market data, says Mark Palmer, vice president and general manager with the firm. By using its CEP and business activity monitoring (BAM) capabilities then, firms can detect patterns in their trading activity that comply or don’t comply with their MiFID best execution policies, as well as help them meet their reporting, reference data and trade history obligations.

To meet the specific requirements of MiFID, Apama has also made customizations in three areas, says Palmer. The first has been to add adapters that allow Apama to be connected to the markets that are impacted by MiFID, regardless of what middleware an event stream is coming in on. “And you need to have that, since before you can actually monitor what the markets are doing you have to connect to them,” he says.

The second is its SmartBlocks, which are prepackaged algorithms provided with the platform. For example, a commonly used Block is an aggregator that creates in real time a single view of multiple liquidity pools coming in off multiple event streams, and that can then calculate a best price according to parameters set by the user, says Palmer.

The third area concerns visualization. “For example, we have an aggregation graphical user interface that shows in a visual way the best price that’s available right now. And you can filter that best price – say show me the best price available for a contract of a thousand shares, or two thousand, or five thousand – and that changes the view of the market.”

Being able to meet the requirements around client classification, best execution, and transaction reporting though are almost the minimum that firms need to do to comply with MiFID, says Warford. And while many institutions are treating the directive as a compliance issue at present, and are therefore focusing on those, there are others – especially among the more entrepreneurial investment banks – that recognize the business opportunities it offers. Going forward then, Warford expects to see more demand for technology that can help firms in the areas of systematic internalization (whereby brokers can take orders and match them with in-house stock inventory and thus effectively bypass the exchanges) and selling market data.

Gissing Software has extended its products to cover the pre- and post-trade transparency requirements of MiFID, says marketing director Mike Hill.

When it comes to systematic internalization, says Warford, Microsoft has partnered with SunGard, whose cross-asset Front Arena solution “pools through products from Microsoft to enable that to happen.” Here, BizTalk for integration, as well as SQL Server for storing internal trade information, are applicable Microsoft tools, he notes. As for the distribution and selling of market data, “We have a partner called Gissing [Software], which has built an entire solution on top of a Microsoft platform.”

“All our products run on Microsoft operating systems, so primarily it’s the use of Windows Server 2003,” says Mike Hill, Gissing’s marketing director. The other aspect MiFID introduces though is data retention, since the directive requires pre-trade data to be stored for 12 months and post-trade data for five years, he adds. “The intelligent point at which to do that storage is the point at which the data is being published publicly, which is our product. So that also means we’ll be using some form of database. Generally, the clients we’re talking to already have a corporate database and licenses for it, so we’ll interface to that, but there’s a good chance it’s going to be Microsoft SQL Server.”

Gissing’s core business has been market data contributions, enabling sell-side firms to publish the prices at which they want to trade instruments to multiple destinations simultaneously (Reuters, Bloomberg and the like) and in real time, explains Hill. Extending the firm’s products to cover the pre- and post-trade transparency requirements of MiFID was therefore a logical extension.

“Since the majority of our existing clients are big investment banks, and it’s the big investment banks that are likely to be both the systematic internalizers – and will therefore be required to publish their pre-trade data – and are likely to be doing the post-trade reporting for the buy side as well, it gives us an opportunity to add functionality to our existing systems, and provide some systems to people on the sell side that are not currently doing large volumes of [data] contributions,” he says.

MiFID is also expected to produce a massive surge in the volume of pre- and post-trade market data circulating in the industry, of anywhere between 20,000 and 30,000 messages a second, says Hill. “And firms looking to provide a best execution policy that uses real-time data are going to have to cope with that volume of messages somehow.”

To this end, Gissing has introduced its MiFID Aggregation Filter Gateway product. It acts as a front-end to the market data sources, allowing users to apply a set of parameters on, for example, which instruments they are interested in and what depth of book they want to see, explains Hill. “Only the data they’ve selected will then be published onto their internal platforms, and that will enable them to cope with the increase in market data volume and yet still use the relevant real-time data in their best execution policy.”

And what about the impact for Microsoft in the European capital markets space as a result of MiFID and its initiative in this area? The benefits, contends Celent’s Marenzi, will depend on what technology the different vendors have developed their tools on. So while a lot of business will fall to Microsoft from firms that already use them, suppliers won’t change to Microsoft because of MiFID, Marenzi predicts.

Warford, meanwhile, is more upbeat. When the initiative was announced at the end of January, he says, Microsoft had 16 partners involved in this program, yet the industry buzz it created meant that two months later more than 50 vendors wanted to work with it on MiFID. And that symbiotic relationship of putting an umbrella over all the domain experts’ offerings has, he claims, “transformed the perception of Microsoft in the capital markets space.”

www.progress.com

www.sungard.com

www.gissing.com