VALUE INVEST - Valuation & Research Specialists

36
Harilaos Mertzanis
their portfolios in foreign financial
instruments. Still, the degree to which
most portfolios are home biased is
enormous, and if this bias partly
reflects currency and financial intermediation
issues, an enlargement of
the monetary union and the harmonization
of financial intermediation
structures and processes will improve
domestic overall welfare by reducing
the degree of home bias.
It is safe to argue that MiFID will contribute
to the reduction of home bias,
since it departs from the previous ISDbased
practice, where EU investment
and thereby member-State economies
have been largely country and not sector
based. Fundraising and IPOs in the
EU today are mainly country-based
and not cross-border. The EU financial
services industry is therefore fragmented,
financial intermediaries are
closely owned and managed and only
recently has consolidation among
investment firms and exchanges started
to materialize, but still this is
observed more within member-States
than between States. Clearing and settlement
is most fragmented and therefore
expensive.
The effectiveness of MiFID in reducing
home bias in the trading of financial
assets and in materializing the benefits
of the widened availability and diversification
of finance will depend on
whether post-MiFID European consumers
of financial services do actually
obtain a true choice of “passported”
financial intermediation services
(order execution, advice and record
keeping), a true improvement in their
access to diversified financial assets
across the EU and a true reduction in
transaction costs by receiving best
execution at no compromise to ade-
quate protection of their interests.
The 3rd stage in the Lamfalussy
process of MiFID implementation is
crucial in preventing the undue introduction
of new restrictions on financial
instruments, thus preserving liquidity
in the market. The reduction of
home bias will also depend on
whether post-MiFID European financial
intermediaries do obtain a free
choice of and true access to markets
and market data as well as to information
about issuers, a true access to all
EU clients, clearing and settlement
infrastructure at low cost and a real
opportunity to innovate in response to
diversifying European consumer
demands.
To the extent that post-MIFID
European exchanges will manage to
acquire improved access to a wider
range of brokers and investors and to
provide cost efficient clearing and settlement
services, thus facilitating the
admission of diversified corporate
securities for trading in the equally
diversified market segments under
their operation, one would expect an
improvement in the reduction of
home bias. The likely improvement
will also largely depend on the true
opportunities provided to as well as
the response of corporations: will they
get adequate access to admission of
their securities on European regulated
markets and see them trading on
alternative systems at low cost? The
actual impact of MiFID on the average
cost of capital in the EU and thus on
market liquidity is a crucial factor in
this respect.
It must be stressed that structural
fragmentation of markets impedes
financial intermediation efficiency
but, we shall see later, may serve as a
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