European and North American investment dealers and asset managers have even more regulatory obligations today.
How come? Markets in Financial Instruments Directive II (“MiFID II”), the largest set of financial reforms to hit the European Union (“EU”) in over a decade, came into force on January 3, 2018. Regulators want MiFID II to accomplish three goals1:
- To govern all aspects of the financial services industry across the 31 EU member states, using a single set of rules
- To ensure financial services firms work in the best interests of their clients
- To greatly expand transparency around investor costs and trading execution
MiFID II’s seismic impact
From 1.4 million paragraphs of legislation, we’ve distilled things down to a few of the most important reforms you should take note of2:
Unbundling of research fees
Broker/dealers must charge separate fees for trading commissions and research. Traditionally both had been bundled under one cost, referred to as “soft dollars”.
Greater real-time pre- and post-trade transparency
Exchanges and firms must release real-time order information, including best bids and offers, trade price, time and volume. The new rules also apply to other markets, like foreign exchange and commodities.
Expanded Over-the-Counter derivatives trading on electronic exchanges
Over the Counter derivatives trading is being pushed from phones to electronic exchanges, where transaction data can be audited for proof of best execution.
Increased measures to protect clients’ best interests
More product information is now required to meet client suitability criteria. Also in place are broader procedures to avoid conflicts of interest.
Aftershocks – MiFID II’s impact on North America
Who is most affected by MiFID II in North America? Global investment dealers and asset managers with global mandates. Here are three areas where we believe there’ll be an impact3:
- Global investment dealers headquartered in North America with European offices may adapt, for the sake of operational efficiency, a company-wide, unbundled research fee model even though soft dollar payments are the norm in North America
- North American asset managers trading European securities will have to decide if the cost of research will be passed onto clients or absorbed into their bottom lines
- North American fixed income dealers who trade in European debt or have European clients will have to spend more on regulatory technology (“regtech”) to comply with the real-time trading rules
Will MiFID II be beneficial in the long run? We think so.
Any regulations that increase market transparency and investor protection are always a good thing in our books, especially if it eliminates the opaque practice of soft dollars. But we believe there will be a transition period as firms grapple with the new rules – and new costs.
To stay on top of regulatory change and regtech, contact us today at 416.925.1700, 1.844.243.1830 or firstname.lastname@example.org.