Has MiFID II been a success and what does the future hold?
The second iteration of the EU’s Markets in Financial Instruments Directive (MiFID II) came into being on 3 January 2018, and it is fair to say that opinion has been divided, on both the motives behind its launch and also its success so far.
The initial objective of MiFID II was to strengthen investor protection and improve the functioning of financial markets by making them more efficient, resilient and transparent. This transparency into buyside and sellside trading activities across all the major asset classes in the capital markets industry was a major factor, but MiFID II hasn’t been universally welcomed.
Has MiFID II been a success so far and is it a piece of legislation that is likely to stick around?
Helping the mid-sized FS firms…
MiFID II aimed to help mid-sized firms access capital markets, and even businesses located away from the big European financial hubs such as London and Berlin. One way it intended to do this was by clamping down on potential conflicts of interest with major investment banks, therefore encouraging a fairer distribution of capital.
Research for equities was a principal target. This is a daily market analysis from banks that is distributed among investors. Previously the research had been bundled for free, with asset managers sending trading business to a bank, and also paying commission.
With MiFID II’s clearer distinction between payments for trading and payments for research, it means that asset managers now pay for the research they want, rather than just sending dealing commission to banks.
…or are mid-sized firms feeling the squeeze?
Yet it would appear the mid-sized firms are paying the price for this unbundling. Research earlier in 2019 by the CFA Institute revealed that nearly 60% of asset managers were taking less research from banks than they were before MiFID II, while the price that asset managers are willing to pay has also dropped.
This squeeze on the mid-sized firms runs counter to what was intended with MiFID II, and even traders themselves are uncertain as to whether MiFID II has been successful, according to a recent study research by SIX Swiss Exchange, Switzerland’s principal stock exchange.
70% of surveyed traders of SIX believe that trading has become more transparent, so that would seem to indicate success. Yet just over one quarter (26%) of respondents believe that dark liquidity will move to lit markets. Given this was a key element of MiFID II, this would suggest that perhaps it hasn’t succeeded in the manner it was intended.
The way forward for MiFID II
One thing is clear with regard to MiFID II – there will almost certainly be changes and tweaks to the regulation over the coming years. In June 2019 the European Securities and Markets Authority (ESMA) updated its Questions and Answers (Q&As) regarding transparency issues under MiFID II.
These Q&As aim to promote common supervisory approaches and practices in the application of MiFID II, and provide responses to questions posed by the general public and market participants relating to transparency and market structures issues.
Not only will these be updated on an on-going basis, but authorities in some of the biggest European countries – UK, Germany, France and Italy – are assessing the impact and success of MiFID II. Brussels is believed to be considering changes to standards.
What is constant is the requirement to be compliant with MiFID II. Achieving this is a complex process and requires control over a company’s internal and external data, which can take resource away from revenue-driving activity elsewhere in the organisation.
MiFID II and the need for continuous compliance
All the uncertainty around MiFID II is exactly why it must be approached as an on-going compliance requirement. It is just one part of a new era of regulation, with others including the General Data Protection Act, the Market Abuse Directive and Regulation, and updates to the UCITS and PRIIPs requirements, as well as the Markets in Financial Instruments Regulation (MiFIR).
This all means that many trading firms are facing a lengthy, on-going process of being compliance ready for decades to come. This entails a digital solution such as Oxial’s game-changing sGRC framework, supported by a network of expert consultants that possess a knowledge around compliance requirements matched by few others.
By using such an automated tool, that removes much of the hassle associated with managing compliance, then the risk associated with non-compliance is managed significantly more efficiently, and effectively. It can also free up valuable staff time to be spent on more revenue-generating activity.
As MiFID II changes and evolves, it is essential to remain compliant. That’s what Oxial can offer, the complete peace of mind that your organisation is 100% compliant with MiFID II and a range of other regulation.
To learn how we can help you, please get in touch with us here.