Drawn up by the EU after the 2008 financial crisis, MiFID II is a significant and wide-reaching reform of the market for financial instruments and it comes into effect on 3 January 2018. Despite being a European directive, its impact will be felt globally. It’s heading here fast. Is the world ready?
Changing the investment landscape
MiFID II is one of the biggest market structural overhauls in history that could radically alter the investment landscape. All investment firms in Europe will be preparing themselves by getting to grips with the MiFID II requirements and the changes they need to make to their businesses in order to comply. There’s a lot of ground work to be done before January and it’s no easy task; the rules are complex, potentially touching many parts of affected firms’ businesses and big decisions must be made.
But it’s not just firms inside the EU that need to brace themselves. MiFID II will also impact global firms wanting to trade EU financial instruments via EU regulated venues.
Preparing for impact
It is expected that the direct legal effect of MiFID II on institutions outside the EU will be quite limited but they need to be aware of the changes which could have an indirect impact on their business. Certain business practices that are common among global investment managers will need to be reassessed in light of the new regime, particularly around research, transaction reporting, record keeping, best execution, and reporting.
There will also be so-called ‘second order’ effects of MiFID II, where behaviours among European participants will change as a result of the regulation. That means those that do business inside the EU will need to be seen as MiFID II friendly when transacting with their European counterparts.
Time is of the essence. Any investment firms planning to undertake MiFID II-regulated business in another European country have until 2 December 2017 to apply for a passport that provides the necessary authorisation. Firms that miss the deadline risk not having a passport in place in time for MiFID II’s implementation, leaving them unable to trade with their counterparties in the European market. MiFID II has a broader scope than its predecessor, so some firms may also need new authorisations or regulatory permissions ahead of making a passporting application.
"MiFID II will also impact global firms wanting to trade EU financial instruments via EU regulated venues."
With many markets and institutions now operating across borders, questions have been raised about how global financial firms will deal with MiFID II.
From what we’ve seen, some firms are understandably focused only on implementing the changes for their European operations. Others, particularly larger investment firms, are taking a more strategic and uniform approach for efficiency and consistency by applying the MiFID II regulations beyond their operations in Europe. Non-EU firms need to look at how they interact with the EU at the moment, whether that’s EU clients or trading EU products, and the MiFID II related issues that triggers.
It’s not proving entirely straightforward, with some questions being left unanswered. For example, under MiFID II investment managers will either have to pay for research themselves or by a separately identifiable charge. For many large investment houses with global operations, the decision on how to do this has been hampered by divergent rules in the US and Canada, and in Europe. In the US and Canada, brokers are prevented from receiving direct payment for research unless they are registered as investment advisers. A global model of payment for research might be established, but it’s unlikely to be before the January deadline.
Threat or opportunity?
Some are predicting that MiFID II could throw global trading into turmoil unless the EU acts fast to ensure its new rules have equivalence with other regimes around the world.
MiFID II will certainly affect how traders, brokers, analysts and fund managers interact far beyond EU borders. But while MiFID II is a significant challenge for investment firms, it’s driving changes that will ultimately benefit end investors and that has to be a good thing.
The strengthened requirements around communication, disclosure and transparency for investors create big opportunities for firms to increase trust, engagement and relationship with clients. It’s also possible that the unbundling of research and renewed focus on best execution could mean better returns for end investors – something that could foster greater trust and confidence in the financial services industry as a whole.
Firms can either see MiFID II as yet another piece of regulation, or think of it as a chance to distinguish themselves in the market. Ultimately, this is about creating competition, choice and value for money.
"While MiFID II is a significant challenge for investment firms, it's driving changes that will ultimately benefit end investors."
After the dust has settled
MiFID II has certainly given those providing investment services around financial instruments a lot to think about – and a lot to do. It will bring radical change and disruption but firms will adapt, and once the dust has settled a new world will emerge built on best practice.
Could we see a new global standard? No doubt markets and regulators around the world will be watching the arrival of MiFID II very closely and it will be interesting to see what happens in 2018 and beyond.
Until then? Focus on your preparations, minimise any potential threats to your business and make the most of the opportunities too.
This article was first published in the Economist.
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