A long-awaited regulatory shake-up, touted as the biggest to hit financial markets since the 1986 “big bang”, has finally rippled through the City and across Europe today.
The second Markets in Financial Instruments Directive (known as Mifid II) has already cost top global banks and asset managers $2.1bn (£1.5bn), a study from the Boston Consulting Group and IHS Markit estimates.
Ratings giant Standard & Poor’s said yesterday that the controversial measures will create “more losers than winners” across the financial world. The European directive, with reams of provisions spanning more than 1.7m paragraphs, is intended to create transparency to benefit investors across all asset classes.
“Mifid II marks a real watershed moment for financial regulation,” said the City of London Corporation's Catherine McGuinness. “Financial and professional services firms have worked hard in recent times to implement these onerous and complex changes. While they have been a big distraction for firms, I am certain they are well-placed to strengthen their position in the global marketplace.”
|A few of the key rules from Mifid II:|
IT sevice providers will likely benefit from the new rules, as will large sell-side brokers which can absorb the costs of research, according to Nick Bayley of corporate finance adviser Duff & Phelps who formerly worked on Mifid II policy at the Financial Conduct Authority (FCA).
But then there are the losers. Along with smaller broker firms more reliant on research, there are the voice brokers, and buy-side firms which have to deal with even more strenuous transparency and reporting obligations.
Voice brokers will especially be burned by new rules which require firms to report bundles of information to demonstrate they are executing clients’ trades – even in bonds and off-exchange derivatives – at the best prices and in the right venues. Since it is easier to track and report this via electronic means, voice broking could take a big hit.
Meanwhile, asset managers are juggling a heap of other regulatory changes. “A swathe of complex EU regulatory reforms will come into effect over the course of January 2018,” said Jonathan Herbst of law firm Norton Rose Fulbright. “This includes Mifid II, the Markets in Financial Instruments Regulations, Benchmarks Regulation, Packaged Retail and Insurance-based Investment Products Regulation and the second Payment Services Directive.”
Surveys have shown significant portions of the industry will not yet be fully compliant with Mifid II, while Rsrchxchange – a portal which compiles investment research to allow fund managers pay-as-you-go access, and has several of the world's largest fund managers on its books – has seen a last-minute rush of subscribers in recent weeks.
The City regulator has shown signs of leniency, but has made it clear that asset managers and investment banks cannot ignore Mifid II. “While the FCA has said they’re not expecting perfection on day one, the expectation is for firms to have made all reasonable efforts. Those that haven't should expect little sympathy from the regulator when they do come knocking,” said EY's Uner Nabi.
Although the sweeping reforms are dreaded by many in the industry, Mark Pumfrey of equities marketplace Liquidnet said the changes would “bring capitalism to capital markets”. Rebecca Healey, Liquidnet's head of market structure and strategy, agreed that Mifid II was long overdue – “Turkeys don't vote for Christmas,” she quipped, explaining why the market had not naturally corrected.