Fixed Income Leaders USA Summit 2019

June 18 - 20, 2019

Philadelphia 201, Philadelphia

44 (0)207 368 9576

Lessons from Europe Post MiFID II – New Opportunities Beckon


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Touted as the biggest regulatory shake-up in the European financial sector, MiFID II finally came into force in the first week of January, this year. While many see it as a game changer for the region’s Exchange Traded Funds (ETF) market, others believe that it is more of a whimper than a bang.

The uncertainty is obvious. The sheer scale of the legislation covering everything from trading venues to commissions – and the multiple reprieves granted to certain parts of the market does give a feeling that the regulators might have spread themselves too thin. Nevertheless, the potential gains of MiFID II still outweigh the qualms.

It might just be that magic wand for EU regulators to restore the faith of investors on a market that has struggled with unmanageable debt over the past few years. Currently, there are five European countries whose debts are more than their overall economic output and twenty one that have debts more than the 60% Debt/ GDP limit set by the Maastricht Treaty.

Given this scenario, MiFID II promises to dramatically overhaul the European financial industry while making it less likely to collapse to a crisis. John Liver, Partner, Head of Global Regulatory Reform, EY, shares a rather interesting viewpoint highlighting the large scale implications of MiFID II on the existing market . He says, ”The European banking and regulatory reform program is fast becoming a reality that will transform the investment industry... Firms that manage the regulatory agenda as part of their strategic evolution and maintain flexibility will capture market opportunities in contrast to those that view implementation merely as a compliance task.”

Early Impacts…

MiFID II reforms insist on higher levels of transparency to increase security for investors like those who suffered serious setbacks during the Europe Debt Crisis. Investors are obliged to submit detailed reports, outlining a trader’s identity along with the algorithm which drives the kind of purchase/sell decision to their national regulator within two days of a trade.

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MiFID II does not provide any leeway to OTC contracts. Rather, it stands to transform how eligible OTC products are reported, traded, and priced. The implications are already being felt across by not just the core financial sector but also market infrastructure providers, retail banks, and energy providers.

While banks are the prime target for MiFID II, Asset Managers are also being uniquely affected as they comply with several of the rules for the first time. A recent article published on the Financial Times predicts that the entire sell-side fraternity across the industry will splurge a staggering €2.5 billion to comply with the regulatory requirements. This equates to €10.3 million on an average for every firm. A major share of this cost will be attributed to technical requirements for transaction trading. But despite the cost factor, MiFID II has the potential to offer a competitive edge for entrepreneurs who have planned in advance to comply.

The requirement to file transaction reports has compelled financial firms to implement high-end automated trade reporting platforms. In fact, a byproduct of the MiFID II is a rapid emergence of tech service providers in the finance sector. Clearly, the driving force behind this is the inability to respond to the stringent demands of the MiFID II without being backed by emerging technologies, as not responding is NOT an option!

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”There will be a bit of a mad dash,” said Mike Stepanovich, who heads the enterprise services division of Visible Alpha. Having spent months on up-scaling the technology of his organization to be compliant with the newly outlined policies, Stepanovich is certain that majority of firms will not be ready, as the process is nothing less than ‘backbreaking’.

Approaching the Appropriate…

The responsibility now lies with banks to identify appropriate investors when making any kind of selling decisions. The way research is conducted is poised to change, as the EU concierge holds the right to discard a financial product that is deemed to be risky.

The most controversial reforms of MiFID II require asset managers to pay for investment related research executed by brokers and bankers. The intent behind this reform was to reduce conflicts in interests. However, the same reform has raised questions on the very essence of research. Analysts predicted that investment on research is set to shrink. ShareSoc’s Bentley claimed that the existing disparities among investors in terms of accessing the research data is only going to rise, which is not desirable.

The fee is to be paid by either the client or the investment manager. The likelihood of the latter is higher, which will again, squeeze profit margins. Nonetheless, the research regime has been smooth so far, which is a significant achievement.

Double Volume Cap - How Dark is Dark Pool Trading?

Restricting Dark Pool Trading is one of the key provisions of MiFID II in its attempt to enhance transparency within the trader’s community. When the volume of dark trading in a stock exceeds the total stock by 4% across trading venues, limitations are imposed. Stocks in such cases can trade on venues which are supposedly more transparent, for example, the traditional exchanges. Details pertaining to offers and bids are published in these platforms, long before the transaction takes place.

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The Double Volume Cap has been a fairly complicated deal to implement by veterans such as Markus Ferber (European Parliament’s Economic and Monetary Affairs Committee’s member). Ferber specified during a speech that the cap will lead to an inexplicably difficult situation owing to lack of accurate data in the European market. Reports reveal that while 75% of the trading venues have provided data, a large portion of it is majorly inaccurate. Only 2% is reported to have the correct data. The plan was to conclude the process by this March, and enlist the instruments identified by the double volume cap since the beginning of the year. However, market experts are still unsure regarding the implementation of the cap.

Lastly – Is USA Impacted?

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While the reforms are not a mandate for the US, it cannot escape the global repercussions. Both economies are going to be impacted severely, as predicted by economists. But, as a plan to mitigate the ill-effects – a safer bet for the world’s largest economy would be to adopt the highest standards and not just juggle between regional benchmarks. In the words of Larry Fink, chief-executive of BlackRock

“We have to see how MiFID II works out in the European environment for us to have a real strong opinion globally, but I think the trend . . . is probably movement towards that fiduciary standard worldwide”.


Make sure to download the Fixed Income Leaders Summit agenda to check out all of the great activities, speakers, and sessions planned for this year.