MiFID II : the first 30 days
After many years in the making, MiFID II has now become part of the regulatory furniture in Europe. However, the regulation’s first 30 days revealed lingering concerns around the scope of the changes
The implementation of the second Markets in Financial Instruments Directive (MiFID II) has largely been successful. Some were more prepared than others for the change when MiFID II was implemented on 3 January, armed with a host of new functionality and systems to help meet the new regulatory obligations.
There were challenges, and, at first, some firms and banks struggled, whether it was getting to grips with the unprecedented extent of the change, or by hiccups brought about by the European Markets and Securities Authority’s (ESMA’s) delay in publishing double volume cap (DVC) data.
Steve Grob, director of Fidessa, a British software firm says: “[ESMA] has difficulty in calculating something as seemingly simple as the dark pool caps.”
However, now is no time to take the foot off the pedal, with a slew of other regulations, such as the General Data Protection Regulation (GDPR), the Fundamental Review of the Trading Book (FTRB) and Central Securities Depository Regulation (CSDR), just to name a few, coming down the pipe.
And if that didn’t seem bad enough, recently at the ISITC Europe forum, member of the European parliament and vice chair of the Economic and Monetary Affairs Committee, Kay Swinburne, warned of the third coming — MiFID III.
Although it may seem like the bulk of the effort associated with making MiFID II compliance a reality is done, the work had really only just begun. A number of kinks in the framework and delays to key aspects of the ruleset mean that resources will be dedicated to fixing certain short-term tactical solutions well into 2018. Just a few days after MiFID II went live, the Personal Investment Management and Financial Advice Association (PIMFA) compared MiFID II’s drafting, finalisation and implementation to a Hollywood blockbuster.
“Seven years in the making, with a budget of over $2 billion and running in compliance costs, the monster movie that is MiFID II is finally on general release,” PIMFA explains. “At the time of writing, the script is not yet complete, many areas of the new law and regulations remain opaque and greater understanding is needed before firms and their overburdened compliance officers can fully get to grips with exactly what they have to achieve.”
But that was at the start of January, and a lot has already happened since then.
Although EU markets on the surface appeared to bed down MiFID II into their systems without much concern, market studies highlighted issues with publications of data released in MiFID II’s second week of implementation, which caused a few teething problems.
Greenwich Associates in London stated that MiFID II’s rules on payments for investment research were predicted to have already shrunk the market for European equity research by an annual $300 million, as of 9 January. The market intelligence firm found that more than 35 Europe-based study participants reduced this year’s research and advisory budgets by 20 percent year-over-year.
In the same week, ESMA delayed the publication of the data on the DVC mechanism for January to avoid creating what it described as a “an unlevel playing field”. According to ESMA, the quality of the data did not allow for a sufficiently meaningful and comprehensive publication of DVC calculations.
Meanwhile, Moody’s, the global capital markets analyst, warns that MiFID II will be “credit negative” for the industry and would “intensify fee competition”, with a shift “to passive funds”.
Marina Cremonese, vice president and senior analyst at Moody’s, says that MiFID II will mean a credit negative for Europe’s asset management industry as it will accentuate the move to cheaper passive funds, intensify competition and drive sector consolidation.
Cremonese says: “The introduction of MiFID II will put pressure on asset managers’ profits by lowering their effective fee rate and increasing their costs.”
“Cost saving initiatives, new investment solutions and mergers and acquisitions will likely offset some of the negative effects, limiting their credit impact.”
As time has progressed, more issues and hurdles became apparent. Christian Voigt, senior regulatory adviser at Fidessa, comments: “Understanding the intricacies of MiFID II is rather like peeling an onion—you peel enough layers and you’re bound to shed some tears.”
Similarly, Paul Young, head of exchange-traded funds (ETF) capital markets for Europe, the Middle East, and Africa at State Street Global Advisors, conceded that he had seen uncertainty among traders.
“While the expectation is that the extra transparency and more visible, volumes and price required by the new rules will provide greater confidence to ETFs, investors in the long run, have seen some uncertainty among traders as to how these volumes and prices can be captured and consumed,” he explains.
“There has been some fragmentation on terms of potential reporting venues which if anything has driven exchange order book volumes to dip slightly on the traditional regulated exchanges.”
“A greater amount of off exchange volume is now visible via multilateral trading facilities (MTFs) and traders both on the buy-side and sell side are trying to figure out how to consume this data to help support their activities.”
Young advises that, as traditional data dissemination models adapt to this, the industry might help itself by “taking steps towards a consolidated tape, which will be greatly welcome by investors and trading desks and will be supportive of further growth of the European ETF industry”.
Sarj Panesar, head of business development for asset managers at Societe Generale, says that he had already seen some changes, with regard to transaction reporting, change in venue of execution and reporting on new data, in particular.
He notes: “This, as we have seen with Solvency II and packaged retail and insurance-based investment products (PRIIPs), will only increase the data delivery requirements over the upcoming months and years.”
“With regards to the services that we provide and SGSS’s obligations we have not had any major issues reported but we remain vigilant to ensure that we comply with the requirements. From a client perspective we have had a few queries from our clients asking for clarity in terms of the finer points of the regulation.”
Alex Foster, head of insurance, finance and payments sectors and post trade services at BT, states: “MiFID II affects a large set of financial firms, not just the bulge bracket banks, although the sheer weight of what needs to be complied with is perhaps swayed in the bulge brackets favour, with more people and resources required to implement the changes as regards new technology, infrastructure and compliance teams.”
Nadine Crepin, head of product risk framework at BNP Paribas Securities Services, said: “Even though the directive is now live, some obligations will not be enforceable until January 2019, such as the ex-post reporting for costs and charges. We therefore remain in ‘project mode’ to some extent, although of course lighter than over the three previous years.” She adds: “Identifying the real impact on the market and on organisations will take time, as the directive has not been transposed in each European economic areas (EEA) country yet.”
Brian Collings, CEO and chair at Torstone Technologies, says of MiFID II: “It’s hard to assess the success of it, however, based on our experience, individual firms have managed well. There were some challenges with the consolidation of such large amounts of information, industry-wide, but the fact that these are being resolved in January means it’s just a small blip.”
He adds: “In data terms, you now have to have a legal entity identifier (LEI) in order to trade but that rule has been delayed for a further six months. [ESMA] said, as long as you are in the process of getting an LEI, you can still trade. Many entities still require LEIs, however, given the scope and complexity of the regulation, it’s understandable that this has happened.”
Mack Gill, COO and board member at Torstone Technology, says: “We were very close to our clients and liaised with them constantly during the handover period. MiFID II applies to the whole industry, impacting the front office especially, with the new rules on research unbundling, which is changing the business models of both the sell-side and the buy-side. The full impact of that rule change will take time to materialise.”
He added: “Operationally, we support a large proportion of the UK broker market and the implementation process for this segment of the market has been smooth. I think everyone in the industry was pleasantly surprised; however, there had been a significant amount of preparation to ensure that this was the case. That being said, there were some last minute challenges such as buy-side institutions that had issues managing the correct data components for trading and transaction reporting.”
He also explains that in the broker community, “our clients were given a MiFID II specific module, on top of the Inferno platform; this helped them to fulfill all of their transaction reporting obligations. Overall, we’re very pleased with the rollout”.
When asked if MiFID II had distracted from any other regulations, Collings explained: “GDPR will be with us very shortly, in May. It is also worth mentioning the Fundamental Review of the Trading Book (FRTB), which affects sell-side institutions such as banks and brokers.
That has now been delayed for another two years; however, this is not as a result of MiFID II. It was just that many of the big banks required extra time to prepare for implementation.
As Panesar puts it: “The MIFiD II journey has just begun and this will be an evolution as the industry becomes normalised to these requirements.”