In the scramble to comply with European MiFID regulations before the November 1 deadline, many UK and European firms have overlooked the impact on their outsourcing contracts.
Markets in Financial Instruments Directive (MiFID) will create a cross-border investment-banking environment throughout Europe, but according to UK law firm Eversheds, many firms haven’t considered the effect of the regulations on their outsourcing contracts.
Our experience is that firms are leaving that until last and haven’t given it much thought, said Simon Gamlin, an associate at Eversheds.
From November 1, all existing and new outsourcing contracts will have to comply with guidelines set out by the Financial Services Authority (FSA), which covers issues such as exit strategies and business continuity. Given that most outsourcing contracts take up half a shelf of file space, UK firms have been reluctant to sift through them or enter potentially tricky conversations with suppliers.
Once you’ve signed a contract, going back to renegotiate is difficult as suppliers can say ‘it’s outside the existing services and can we have more money please’, said Gamlin.
Companies could also come unstuck with their intra-group service agreements, as some relationships are subject to the same FSA outsource guidelines.
But as Rex Parry, head of the technology group at Eversheds said: The reality is, a lot of internal outsourcing arrangements aren’t documented at all. I think it’s a case of identifying what documents are in place and if there is nothing, then some sort of contract will be needed to be established.
It’s not just contracts that could slip the deadline. A survey this week by Atos Consulting, the consulting arm of Atos Origin, revealed a wait and see attitude to all aspects of MiFID compliance among many financial organizations.
Analysis of spending patterns at 15 investment banks found that they had outlayed 20-25% less than they’d expected, which to Atos suggested that they put MiFID in the compliance camp rather than saw it as a competitive tool.
While this lack of spending will have little effect on November 1, Alan Jenkins, European head of MiFID at management and technology consultants BearingPoint, warned that these firms would suffer for their lack of activity 12 to 18 months down the line.
Pre-trade data could increase fourfold and post-trade data could double as the number of trading venues increases, so coping with the increases in volume would put a strain on existing IT systems
There are going to be significant increases in market data and firms will need to hook into and will need more bandwidth, said Jenkins.
Investment in service-oriented architecture (SOA) will also increase, as MiFID forces investment firms to break the silo mentality of keeping derivatives, processing equitities and other financial instruments on separate systems.