Just two years ago, Hungary, Poland, the Czech and Slovak Republics and Slovenia all implemented the European Union's (EU's) financial services regime, as it was then, as part of their accession. But in the same year, 2004, the EU set in train MiFID (the Markets in Financial Instruments Directive), a wide-ranging reform of the financial services sector, which all member states are required to implement by 1 November, 2007. With Bulgaria and Romania having joined the EU since then, what will be the impact on the Central and Eastern Europe (CEE) countries and what will they do to implement MiFID?

The new legislation will change the environment in which banks and investment firms operate across Europe; in the UK these changes are seen as the most significant for 20 years and have been compared with 'Big Bang' – the deregulation of the City of London – but the impact is potentially much greater in the CEE states, which have only recently adjusted to the current regime and where current legislation and supervision is often less wide-ranging.

The MiFID reforms are designed to create a single European market across the European Economic Area by stimulating competition and making it easier to carry out cross-border trade using a common European rulebook for regulated firms. These include banks, investment firms, brokers and dealers, investment managers, stock exchanges, markets and trading platforms.

The new rules have been heavily influenced by how the Financial Services Authority (FSA) regulates the UK, and from a CEE perspective this could be seen as an unwelcome move towards an Anglo-Saxon style financial services regime. Some have even asked whether it is really necessary or desirable for CEE markets because the benefits to local customers are unlikely to outweigh the substantial costs that MiFID will entail. This is a moot point, because the European legislation was never subjected to formal cost benefit analysis, even for western European markets.

Although MiFID is designed to harmonise financial services activities across Europe, there are already obvious problems. For example, in the UK the FSA already has hundreds of staff monitoring and enforcing its rulebook and it regularly imposes large fines on firms and individuals and has forced compensation payments running to billions of euros on companies found to have transgressed. In contrast, there is no equivalent tradition of enforcement, nor indeed enforcer, in other countries, including some of those that make up the CEE. So, to make MiFID work, the EU needs to beef up the regulators, not just the regulation. In many of the CEE countries, regulators have limited budgets and staff are badly paid in comparison with the private sector. It may, therefore, not be that easy for all regulators to attract the resources to enforce MiFID.

Some parts of the new regulations are directed at shaking up markets and stimulating competition, and MiFID will also result in the removal of protections enjoyed by some of the national stock exchanges in Europe. Currently, some countries require transactions to be executed or reported via a national stock exchange ('concentration' rules) but, under MiFID these protections will be abolished to allow free competition from exchanges in other countries and from other types of execution venues. In some sectors, the main competition comes from investment banks, which offer their clients over-the-counter trading – MiFID calls these firms 'systemic internalisers' – and from electronic trading platforms which enable counter parties to trade on 'alternative' markets and systems. Many of the stock exchanges in CEE are relatively small and are concerned about the practical impact of such changes on their business.

MiFID deliberately enhances the competitive position of alternative trading systems (to be known as multilateral trading facilities) in the hope that electronic trading will increase competition and reduce transaction charges. MiFID also introduces a pan-European regime, initially in the equity markets, to achieve greater price transparency. For any one stock there should be a 'feed' of real-time information about the prices of trading across Europe from different venues (i.e. regulated markets – such as the national stock exchange – multilateral trading facilities and systematic internalisers). This feed will report the prices available and details of limit orders (pre-trade transparency) and the prices of transactions as they are concluded (post-trade transparency).

Trade execution will also change thanks to new processes that reflect best execution requirements and the wider choice of execution venues from across Europe. Market participants are still assessing how they will operate in this new environment. Some new services, such as electronic trading platforms, are already being launched specifically to take advantage of the changes, and firms in the CEE will need to think about this sooner rather than later so as to avoid being left behind.

There is also already a lot of discussion about regional or European hubs. Post-MiFID, the European legislation encourages banks to abandon separate national banks in favour of local branches of their European parent; many institutions are also establishing regional or European hubs to co-ordinate trade execution. In the CEE, this poses threats but also offers opportunities.

But the very style of Anglo-Saxon-type regulation will bring significant changes for institutions in the CEE – both locally incorporated banks and local branches of Western European institutions. For example, in retail sectors, there will be a much greater distinction between 'advised' distribution channels and services, which will be subject to a regulatory-driven 'suitability' assessment process, and 'non-advised' channels, where different processes will operate reflecting the MiFID 'appropriateness' requirement.

MiFID also regulates the internal organisation of banks and investment firms, which means that CEE institutions will need to adopt Anglo-Saxon style controls, particularly Chinese walls, and other systems to protect clients from possible conflicts of interest, not just within the corporate entity concerned, but viewed from a group perspective.

So what is being done to implement MiFID in the main countries in the region? In the Czech Republic the implementation of the MiFID is a hot topic among professional associations, the Czech National Bank and the Ministry of Finance. The main framework for implementation was decided in February this year. On 16 April, 2007 the draft amendments to the relevant legislation, including the Capital Markets Act, were submitted by the Ministry of Finance to an inter-departmental procedure for comments. The public have also been notified of the amendments to the legislation, and the Ministry of Finance and other professional associations are preparing a conference in Prague on 22-23 May, which will address issues relating to the MiFID. Elsewhere in the CEE, Poland has recently finalised the first draft for the amendments to the legislation to incorporate the MiFID obligations. The Polish Banking Association and Ministry of Finance has also established a working group for co-operation between the regulator and the market.

Unlike the UK, which is well advanced in its preparation for MiFID, in the CEE both governments and the private sector need to achieve a great deal between now and 1 November.

All banks and other firms in securities and investment markets will need to assess the impact of MiFID implementation. As well as the costs involved in achieving compliance in what is a very short time frame, for many firms MiFID will present significant threats and opportunities. The sooner firms address the implications of MiFID, the more likely it is that they will have first-mover advantage and minimise threats and maximise opportunities.

Iain Batty is CEE regional head of commercial at CMS Cameron McKenna.