As MiFID II will have a substantial impact on institutions providing financial services in the EU, it is important for business owners to understand the change and how it will affect their business. On the 3rd of January 2018, most of the MiFID provisions for the MiFID II Directive and MiFIR came into effect to replace Markets in Financial Instruments Directive I (MiFID I) which had been in effect since November 2007. The Directive is a key component of the European Financial Services regulation with the intention of creating a level playing field for financial institutions to compete in the European Union’s financial markets, as well as guarantee a reliable level of consumer protection across the EU.
Innovation in financial markets and instruments increased fragmentation in data and markets, and the rapid pace of technological change combined with demands for reform following the global financial crisis in 2008 was all instrumental in the development of a new legislative package to take the place of the MiFID I system. The package consists of a revised MiFID Directive, a new regulation, the new MiFIR (Markets in Financial Instruments Regulation), and delegated legislation.
What MiFID Means for the Financial Sector.
Although the impact on the financial sector will not be as radical as that of the original MiFID, the scope of the directive is far-reaching. Part of the complexities when dealing with MiFID II is to consider the wider range of initiatives covered by the new legislation including:
– More intensive commodity derivative regulation;
– Improved pre- and post-trade regulation of high frequency and algorithmic trading;
– Increased consolidation of market data;
– Improved governance for trading venues;
– More extensive transaction reporting;
– New investor-protection requirements;
– On-exchange trading of standardized derivatives
– A new framework for non-EEA companies to access the EU markets.
– 3 July 2017 was the deadline for the transposition of the MiFID Directive into national law.
– 3 January 2018 most of the provisions of the MiFID II Directive and MiFIR came into effect and MiFID I was repealed.
– 3 March 2020 is the deadline for a review of MiFID II and for the Commission to report on its functioning.
– 3 September 2019 specific requirements for consolidated tape providers are expected to come into effect and is also the deadline for the Commission report on providing an EU-wide consolidation tape.
The EU rule requires payment for equity and fixed-income research. During the transition to MiFID II it is not clear how the research-commission restriction will be enforced by the regulators and how they will deal with failing price-models. The change to an unbundled model will limit the long-held custom of dealing commissions and cause disruption globally for both the buy and sell sides for years to come. In the meantime, equities trading are also coming under pressure.
Regulators exercised leniency during the initial stages of enforcing the MiFID II research commission restrictions with an informal grace period after the launch period. Although banks are eager to price competitively under the new rules, regulators will be keeping a close eye to ensure that prices are not too low as this could nevertheless constitute an inducement.
Under-pricing would defeat the spirit of MiFID II and it may force independents and second-tiers out of the market. Asset managers that refuse to pay a fair price for research could face potential penalties and further scrutiny. Long term this may result in anti-trust actions. According to financial reports the UK and EU regulators are liaising with banks regarding pricing concerns in view of reports that banks are dropping prices as the initial amounts proposed are resisted by managers.
Review of MiFID II Research may lead to MiFID III
As markets adapt to MiFID II during 2018 it is inevitable that regulators at local and EU level will publish guidance to further address the difficulties encountered by firms in putting the rule into practice. As the review deadline is scheduled for 2020, more radical changes may be on the cards. Some parts of the research rule may be softened by EU lawmakers in the post-Brexit interim to meet the needs of EU-27. The review will investigate how the rule will affect the research coverage of small to mid-sized companies for the first quarter of 2019.