The revised Markets in Financial Instruments Directive (MiFID II) came into force today, ushering in the biggest financial regulation upheaval since Dodd-Frank in the US, with the aim of introducing greater transparency to financial markets such as equity, fixed-income, FX and exchange-traded funds (ETFs).
Some teething problems were expected when the clock struck midnight and in the event, regulators in Britain and Germany gave some of Europe's biggest futures exchanges (Ice Futures Europe, the London Metal Exchange, Eurex) more time to implement the rules – quite a bit of extra time, 30 months to be precise. This will take the MiFID 'go-live' date for these exchanges to June 2020, long after the date on which the UK is due to leave the EU (considering there may also be a transition period for Brexit).
This follows an earlier reprieve announced by the European Securities and Markets Authority (ESMA), allowing institutions an extra six months to comply with MiFID rules on having individual reference numbers for trading (known as Legal Entity Identifiers/LEIs). See this CTMfile article for more details: Is your LEI code ready for MiFID II?
'Brutal' amount of changes
MiFID II requires more detailed reporting of trades, necessitating a significant upgrade for the trading and reporting systems in financial institutions and brokerages, costing large banks upwards of €40 million. Many have criticised the level of detail that MiFID demands and some argue that national regulators won't be able to process and oversee the huge amount of data that will be produced.
One regulation lawyer told the Financial Times: “In truth, keeping up with all of the rule changes, updates and reprieves is absolutely brutal. You need the ability to identify all the changes – which is impossible to master – and then work out how they track through legally, operationally and commercially.”
In short, MiFID II comes at a huge cost to trading institutions. It also unbundles the cost of research, which asset managers previously received gratis (paid for as part of trade commissions). This FT author points out how this could lead to a situation in which smaller customers are unable to get to access to the best research products, giving an advantage to the big players. Due to the cost of implementation and the cost of research, the unintended consequences of MiFID II could be that financial markets in future are increasingly dominated by the big trading houses and big asset managers. This would be the opposite of MiFID II's desired intention to create fairer, more transparent and more competitive markets.
MiFID II delayed until January 2018
The Markets in Financial Instruments Directive (MiFID II) will come into force on 3 January 2018, meaning a one-year delay in its application.
How MiFID II will curb bank spending on research
MiFID II will require that research is priced separately from execution/trading, meaning that investment managers will have to pay separately for research and trading services from banks
What would MiFID II delay mean for treasurers?
ESMA has indicated MiFID II implementation could be postponed. What – if anything – does this mean for corporate treasury?