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Although MiFID has yet to fall on the EU, the global nature of the industry demands that U.S. firms pay attention to the changes at hand.

Just in case compliance officers for U.S. financial services firms don't have enough on their plates with domestic legislation and regulation, in November 2007, the European Commission will implement the Markets in Financial Instruments Directive (MiFID), which will have a lasting impact on the way firms conduct business in the European Union (EU) and with clients based in Europe. The increasingly global marketplace and the structure of bulge-bracket firms that operate overseas demand that U.S. institutions pay attention to this regulation and others that arise beyond American borders.

European regulators were expected to sign off on the final version of MiFID in early summer, and lawmakers from each individual EU member state will sign into law individual flavors of the regulation in early 2007. That leaves the global financial services industry with a lot to digest. "It opens up a whole bunch of opportunities, it comes with a whole bunch of new requirements and it's going to require considerable spending to get things in line," says Octavio Marenzi, founder and CEO of Boston-based research and advisory firm Celent.

There will be no backdoor for U.S. firms, which will have to comply with MiFID to participate in European markets. "European regulators will start to get a bit more muscular about actually applying their legislation and the regulation outside the borders of the European Union," notes Marenzi. "I don't think that European regulators are going to allow the large U.S. firms to circumvent MiFID by sending their order flow back to the U.S. for execution. I think they're going to frown upon that and not allow it to happen."

Among the many major changes that MiFID initiates is a restructuring of how financial institutions view their client base. If U.S. firms plan on working with clients in the EU, they will have to meet these changes head on.

Customer Service

"One of the things that MiFID very clearly lays out is that the customer is king," relates PJ DiGiammarino, founder and CEO of JWG-IT Ltd., an industry think tank and unaffiliated commercial spinoff of the MiFID Joint Working Group, a volunteer consortium. MiFID puts into play new rules governing client interaction and the appropriateness of investing strategies depending on an individual client's personal profile, DiGiammarino relates. With these rules comes accountability, raising the bar on investor protection. Under MiFID, clients are classified in one of three categories, each of which commands different levels of regulatory protection: retail client, professional client and eligible counterparty.

"I think what U.S. firms will begin to notice very quickly under MiFID is that there's a changed emphasis, a change of accountability ... where they're going to have to comply with a set of guidelines that are fundamentally different from the way the U.S. market operates, vis-à-vis information to those clients and the rules that they have to follow on their behalf," explains DiGiammarino. "Not only do [firms] have to determine whether that customer is suitable for a given product, but [they] have to determine whether that particular transaction for that asset class is appropriate for that customer at that particular time."

Any European investor, individual or institutional, is going to expect the protections afforded by MiFID when dealing with a U.S. business. Even U.S. investors might consider taking advantage of the protections afforded by MiFID, suggests DiGiammarino. "What [MiFID] does then is start introducing a new way of thinking about the types of protections I can get as a consumer in the U.S. from a European institution that I couldn't get from a U.S. institution," he says.

So keeping that business in the United States is going to require a robust method of retaining and understanding customer data. According to Celent's Marenzi, U.S. firms will have to rethink a variety of front-office systems. "It goes all the way from the customer information system and how customers are classified to what information is stored about the customers," he says. "It goes to conduct of business rules in terms of making sure [the rules] are ... in the systems."

In addition to client profiling, to further protect the investor from fiscal bumps and bruises, financial institutions will be required to provide something with which U.S. firms already have become quite familiar -- best execution. However, despite the familiarity of best execution requirements as mandated by Reg NMS, differences in the European market structure make best execution a considerably more onerous proposition.

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