Whilst there has been much noise and discussion around OTF, the simplest way of considering this new structure is that it allows the broker model to persist - think MTF but with an allowed discretion at the point of trade where the transaction has to be adjusted to allow both counterparties to agree the trade - and no it does not make sense for a bank to run an OTF. While the SI model never really took off under MiFID I, the new legislation will mean that SI captures most of the bilateral OTC business that banks currently transact with their customers. This new SI regime will profoundly change the bilateral trading model that currently operates and is likely to impact many firms - not only a few large ones.
The new transparency regime will mean that most trades (allowance for exclusion of large in scale trades to protect liquidity) are reported immediately to the general public at a reasonable charge, and in any case free after 15 minutes. However whilst MiFIR will certainly change the underlying market structure, MiFID will have at least as profound an effect. With one eye on conduct risk imagine that all trades will now be subject to a 'retail like' process around duty of care to the customer... All customers will be treated under a far more stringent regime, and when one considers the significantly stronger approach being taken by regulators on non-compliance in this area, there are likely to be some hefty fines being handed out in the coming years.
Looking at the Directive, MiFID will have the most profound effects on the industry. There is an entire section on investor protection, with which UK institutions will be familiar if considering the current UK approach to retail protection. Best Execution rules will involve four significant levels of work in planning and management; Policy, Execution, Monitoring and Reporting. The burden of compliance with this new approach to protection of non-banks will involve significant planning and IT development, to enable demonstration of the cross-checks and process changes that fulfil these protections.
There are many areas of MiFID that remain to be clarified, either due to text being unclear at the detailed implementation level, or because one section of MiFID contradicts another.
