Has it really been a year since the infamous January Directive rocked our asset management world? The answer, quite frankly, is yes. With the MiFID II anniversary this month – are you commiserating, celebrating or are you still coping with the financial fallout? (There were 30,000 pages to read through, so we wouldn’t be surprised if you choose the latter.) We’re not here to give you bizarre ‘birthday’ puff piece – we want to talk about the current state of the regulation and how it will continue to affect asset managers in 2019.
The Good and the Bad
The Markets in Financial Instruments Directive (MiFID II) created a disruption to the EU markets, which sparked both structural and operational changes that had be made. But was it all bad?
Here are some major changes that MiFID II set in motion:
- Organised Trading Facilities (OTFs) and Systematic Internalisers (SIs) have increased
- Commodity derivative contracts in the EU have been relocated to the US
- Market structure have been changed, including periodic auction and RFQ systems)
In addition to these points, financial institutions have encountered challenges along the way that shouldn’t be overlooked, such as how to:
- Maintain the quality of data
- Monitor the new standards and best practices
- Sustain the accuracy of transaction reporting
- Deliver optimal levels of transparency
However, with the right preparation and execution, complying with MiFID II will benefit firms in the following ways:
- Consolidating and gaining a better insight into their data
- Increasing transparency with regulatory reporting
- Reducing the risk of ‘dark pools’ over lit book trading
- Honing the untapped potential from the information being distributed
Is It Easier Said Than Executed?
Financial organisations have been feeling the pressure from the regulators to prove they have been efficiently executing the best practices – from before the roll-out to the MiFID II anniversary and beyond. Nevertheless, due to the complexities of the legislation, the preparations have been slow, with some firms lagging in the hope that the regulations will be made clearer and easier to comprehend. Others have purposely waited to see how proactive organisations (who have successfully begun implementing the regulations) for inspiration.
According to Finextra, the findings of a survey carried out last year (which included entries from 100 European capital markets) revealed:
29% of companies experienced major challenges to carry out the best execution of MiFID II, while a staggering 65% admitted they lacked any system or method to ensure that trades were being conducted in compliance with MiFID II’s best execution standards
From ITG’s analysis of over 25 million EU equity trades uncovered:
Lit volume increased from 64% to 70% at the start of 2018 and continued to rise to 74% in March 2018, while with ‘dark pool’ volumes decrease from 23% to 16%
MiFID II Anniversary and Beyond
It’s not a trend or a flash-in-the-pan. MiFID II is ongoing, and it is here to stay. But will firms start to feel more pressure to comply now it has been a year since the 2018 January Directive was launched? The Financial Conduct Authority (FCA) has promoted a relaxed and supportive approach to firms that have demonstrated a willingness to comply and collaborate with the inevitable regulatory changes. However, 2019 is providing financial authorities like the FCA with more data to enforce the MiFID II best practice is met – plus, we don’t know how a post-Brexit Britain will challenge this attitude.
One of the cruxes that 2019 hinges upon is the clarification of the convoluted MiFID II framework. If this is resolved, then there will be less conflict and delay to comply, allowing financial institutions to be more receptive to the positive changes that MiFID II ultimately offers.