1. Some Thoughts on FIX in the Context of Unbundling, MiFID and Hedge Funds Barry Marshall, Co-Chair FPL EMEA Regional Committee

2. 1) Unbundling – UK History In March 2000 Paul Myners asked to carry out a Review of Institutional Investment in the UK by Chancellor of the Exchequer - published in March 2001 One aspect of Review was transaction costs, on which the Government made a statement in July 2001: Myners’ central proposition – costs are substantial; subject to insufficient scrutiny; clearer and more rigorous disciplines could be applied ….clear message from consultation [on Myners] is that the problem is, if anything, greater than he originally suggested ….nor does the Government agree with those responses which suggest that information flows to trustees are likely to be, on their own, a sufficient solution to the problem ….problems run deeper: frequent references to cross-subsidies and difficulty in access to unbundled services Government has a strong preference for market mechanisms The challenge for the industry is to develop much clearer structures and incentives

3. …leading to FSA Consultation Paper 176 and then Policy Statement 05/9 in July 2005 on “Bundled brokerage and soft commission arrangements” FSA’s “basic analysis was a market failure existed….the use of such arrangements to pay for goods and services other than execution lacks transparency....which makes it difficult for customers to tell whether the fund manager is acting in their best interests including obtaining sufficient value for money on their behalf”

4. Jargon Lots of messy definitions “Soft” – “Bundled services” – “Unbundling” – “Stepouts” – “Introductory Commissions”- “Commission sharing” – “Payaways - “Directed commissions”” – “Commission Recapture” Exacerbated by: Geographic perspective e.g. UK v. US Regulatory regimes: FSA principles v. SEC rules BUT: this is of global not just specific regional relevance

5. Practical & commercial, but secondary, issues What should the price be for execution? Agency Vodafone in normal size Principal price for large size in illiquid Daily Mail Agency to buy a large stake in a small cap name What is the value of research? Generic industry study Tailored Will clients allow fund managers to use their money? Clients will decide Isn’t this difficult? Yes, but do the companies fund managers invest in find business easy?

6. Key premises Execution is a separate skill to research Currently clients, not fund managers, are paying for both on top of management fees

7. Models The traditional equities model provides a package of services for a bundled compensation Research Access to corporates Trading ideas Execution Old model of compensation = trading commission New model sees fund managers allocating a value to each service that brokers/research houses provide Changes in execution and research are part of the wider shift in the buy side/sell side relationship

8. Catalysts for change? Markets not going up 15-25% p.a. Pensions crisis Regulators Customer pressure e.g. UK Investment Management Association Disclosure code comes into effect in Q3 2006, requiring pension fund managers to split commission on H1 2006 transactions between execution and research FSA have a Consultation Paper out which essentially asks who is going to look after the retail investor in the same way

9. ….and technology In a world of disintermediation roles change, but technology such as FIX can not be un-invented

10. “ How is the industry planning to update their working practices and procedures with respect to the allocation of commissions in order to comply efficiently with the new rules under CP176. What do they require from the FIX protocol in order for them to achieve these objectives? ” EMEA Business Practices Group, running survey and formulating recommedation – Contact john.white@hsbcib.comjohn.white@hsbcib.com CP176 – FIX’s actions Broker’s Trading Desk FUND MANAGER Researc h Boutiqu e Trade Level Executio n 100,000 Shares of BskyB Research Allocation 40,000 BskyB Monthly Research Allocation Allocation 60,000 BskyB Research Commissio n Pool Broker’s Credit

11. 2) MiFID European Union Markets in Financial Instruments Directive Wide ranging but inevitably will result in: Increased scrutiny of “Best Execution” Data explosion NOT just equities

12. Best Execution… 21.1 Member States shall require that investment firms take all reasonable steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. …whenever there is a specific instruction from the client the investment firm shall execute the order following the specific instruction

13. …..likely to have teeth 21.4 Member States shall require investment firms to monitor the effectiveness of their order execution arrangements and execution policy in order to identify and, where appropriate, correct any deficiencies. In particular, they shall assess, on a regular basis, whether the execution venues included in the order execution policy provide for the best possible result for the client or whether they need to make changes to their execution arrangements…

14. More and more data… Currently in Europe some 25 exchanges, plus a further 15 ATSs, which might be classified as MTFs post-MiFID Systematic internaliser is “an investment firm which on an organised, frequent and systematic basis, deals on own account by executing client orders outside a regulated market of MTF” MTF = Multilateral Trading Facility ATS = Alternative Trading System

15. ...to cope with Investment banks could choose to extend their bilateral b2b platforms to opt for classification as MTFs, thus number of execution venues post-MiFID will be fluid Range of entities caught under the Systematic Internaliser classification might be from 15 full-size universal banking groups (who presumably can afford to invest in the systems changes necessary) to anything up to 400 firms

16. Credibility with clients? Is it going to be feasible for a fund manager to cope with the data explosion and demonstrate best execution if it does not have good electronic systems? Can a fund manager do this without FIX?

17. 3) FIX & Hedge Funds In theory, why should technology requirements be any different from traditional funds? Hedge funds push at boundaries Very often not in “vanilla” (and less profitable?) space of pure equities or pure bonds or pure FX …and equities, bonds, FX etc are not like gas, oil and electricity – they can go through the same pipeline

18. Common sense At banal level rather difficult to telephone through 100,000 orders with 80,000 cancellations in a day Perhaps car company sponsors of Formula 1 hype the benefits to the saloon car buyer, but there must be something in it!

19. Fund of Hedge Funds Many, perhaps, 1500 FoHFs All claim to add value and all claim to do operational due diligence An interesting litmus test - do they ask questions about FIX capability?

20. Conclusions? Technology is key Might fund management need to grow a mentality of driving down costs that the Dells, Tescos and Walmarts have? Might 50% of fund managers need to exit the market?