Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Western EuropeJanuary 23 2018

MiFID II’s soft launch leaves loose ends

MiFID II has been one of the most hotly anticipated pieces of European financial regulation. Its launch in January did not disrupt markets, but questions linger over whether it will meet its objectives. Justin Pugsley reports.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

What is happening?

The Markets in Financial Instruments Directive (MiFID) II went live on January 3, having consumed vast amounts of resources and man-hours within financial institutions and regulators in the two years leading up to the launch.

Reg rage anxiety

However, it turned out to be a soft launch. One industry participant described it more as a live test, given that much of the industry and even regulators simply were not properly prepared. 

Fortunately, regulators took a pragmatic stance and decided to offer some 'transitional waivers' or delays, which meant the markets did not malfunction. 

The European Securities and Markets Authority (ESMA) has given market participants more time to acquire legal entity identifiers that are now mandatory for trading, and trading venues/dark pools have been given breathing space to resolve their technical issues so they can fully report activity on their platforms. Double-cap volume reporting is key for enabling ESMA to monitor whether those dark pools are pulling too much business away from public exchanges and fulfilling transparency objectives.  

National regulators, meanwhile, have suspended opening up the clearing market on exchanges for 30 months, allegedly because of Brexit. Market sources suspect the real reason is to protect the lucrative clearing businesses of national exchanges. 

Why is it happening?

MiFID II is designed to drive market transparency, competition and investor protection. It is intended to create an environment in which investors get best execution, can switch providers relatively easily and cannot be exploited by unscrupulous financial firms. 

However, these noble objectives require vast amounts of data, automation and analysis, well beyond what was previously required. 

What do the bankers say?

Banks have groaned under the huge burden that MiFID II has imposed on them, which have necessitated many new hires, new IT systems and a rethink of business practices. 

In terms of the launch, they are relieved that the markets did not collapse and that regulators prioritised the smooth functioning of markets over strict compliance. 

Nonetheless, there is still much work to be done. Many markets participants continue to complain about a lack of guidance from ESMA and over level two and three rules, and many believe them to be incomplete or in need of further clarification. 

Will it provide the incentives?

As of its launch, MiFID II has started providing more protection for investors and more market transparency so that regulators can pick up on any irregularities in the markets. 

However, the data side is far from complete, hence the recent temporary waivers. This means that MiFID II has yet to provide the full market transparency or even choice, such as opening up clearing, that it was supposed to provide. 

Some industry sources believe it will take years to fully get on top of all the data issues, meaning that supervisors will possibly not gain the full market transparency and oversight they so clearly want for some time. 

The confusion around some of the level two and three rules has led to some industry sources calling for a speedy rollout of MiFID 2.5 eventually leading to a MiFID III that would tidy up overlaps with other market-related rules. 

Another issue is that MiFID may end up undermining one of its key aims, which is to create more competition. Quite simply, compliance is so expensive that it could force many smaller players out of the market. 

Indeed, one unexpected consequence could be emerging around investment research. MiFID II demands that asset managers must pay for their research. It was hoped that this would truly open up the research market to many new providers and help second-tier players. 

Early signs suggest the opposite is happening. The big brokers and investment banks are apparently offering research at very low prices – some suspect well below the cost of production – making it very hard for pure breed providers to compete. 

Big players are doing this to maintain client relationships so they can sell other services. In other words, regulators might view their pricing tactics as an inducement to trade, which MiFID II forbids. 

It is early days, but if low-priced research becomes established it is highly likely to undermine choice, variety and innovation, which would be detrimental to the buy-side, possibly leaving it worse off than in pre-MiFID II days.

Was this article helpful?

Thank you for your feedback!

Read more about:  Reg rage , Regulations , Western Europe