Wow, a GRAND start into the new year 2018! MiFID II just took off! The “Market in Financial Instruments Directive”, what an awkward name, even according to Bloomberg! Not many I know can memorise this easily. Maybe it looks better like this:
Not really! Nevertheless, MiFID II just took effect on January 3rd 2018. This European legislation had grand intensions, since it’s first implementation back in 2007 as MiFID I. Increase consumer protection and increase competition! Great, sounds good!
Well, not so fast! MiFID II wants even more! Fairer, safer, more efficient markets and greater transparency for all! So far so good! Problem is, MiFID is just a ‘directive’, the actual ‘regulation’ was MiFIR (Markets in Financial Instruments Regulation). So if the directive gets revised, what happens to the regulation? Here the answer, you create a new regulation: EMIR (European Market Infrastructure and Regulation). Things is, EMIR and MiFID had conflicts relating to derivatives reporting, hence MiFID II will replace MiFID I, MiFIR and EMIR.
Wouldn’t it be great if all legislations were so simple? .. as done by ESMA (European Securities and Markets Authority)! Considering it took a good 7 years to complete, it only has 1.4m paragraphs of rules. Someones pulling our leg!
So what does MiFID II really want?
Well, lets summaries! It’s true mission:
Make European markets safer, more efficient and transparent. Move a greater part of opaque OTC trading to a regulated space, more audits and surveillance (only authorised trading venues get to execute OTC). So about 50 more data fields for each trade (more reporting), possibly clashing with privacy rules in many regions.
Did we mention transparency, ah yes we did! So how? Fund managers now need to pay brokers / analysts or banks separately for research and trading services, rather than only a combined fee for both. This way clients explicitly see how their money is being used! Yes, you read correctly, analysts will be paid separately! Does that mean super-star analysts will leave banks to set up their own shop? That’s only (seemingly) speculation!
Anything else? Sure, lower costs in market data, improved best execution, volume caps for equity ‘dark-pools’, tougher standards for investment products and much more!
Who does MiFID II want this from?
Everyone! No kidding: banks, fund managers, exchanges, market operators, traders (even high-frequency, algo-traders), brokers, pension funds, retail, credit institutions, alternative fund managers (hedge funds), financial counterparties and even non-financial counterparties! Did I miss anyone?
What markets does MiFID II cover?
All (nearly)! Unlike MiFID I that focused primarily on equity, MiFID II stretches out to equity-like products, fixed-income, commodity and energy, derivatives and structured products. Very impressive!
Did I say nearly? What on earth isn’t covered? Well, exempt are spot FX, money market and bank loans!
Pretty impressive ESMA! So, looks like you’ve got it covered!
Believe it or not, there are still some patches left open. While EU firms or non-EU firms with a EU branch need to FULLY comply with commission handling, trade / transaction reporting and best execution, non-EU firms executing in EU or non-EU firms with EU domiciled funds still have some room to manoeuvre.
Does this sound like MiFID III coming up some time? Lets see. Still enough regulation to keep us quite busy for quite a while!