The vessel is named Markets in Financial Instruments Directive II, and when it reaches port, its regulatory cargo will hold implications for institutional market participants and market operators who buy or sell securities in Europe. In an increasingly global marketplace, that universe is of significant size.
In simple terms MiFID II focuses on four key areas: trade execution, capital requirements, regulatory reporting, and risk management. The European Union’s overarching goal in implementing MiFID II and its corollary Markets in Financial Instruments Regulation is to increase transparency, and by extension, investor protection.
In order to comply with MiFID/MiFIR, market participants are faced with having to digest a vast array of information and to then assess the impact on their activities depending on whether they are operating as an investment firm or venue,
Meant to go into effect on January 3, 2017, MiFID II is a comprehensive, multi-asset-class revision to the original equity-centric MiFID, which commenced in 2007. Specific areas covered include microstructural Issues, data publication and access, venues, commodity derivatives, market data and reporting, and post-trade. MiFID I is substantially expanded as these subjects are now interlinked to ensure that information pertaining to clients, venues and instruments is disclosed so that both pre- and post-trade activities are fully transparent.
The upshot is that as with any regulation, the end-result benefit will not be cost-free. Additional operational costs due to the introduction of new regulatory oversight on existing pre-trade, trade and post-trade processes results in additional IT and operational process controls. These are likely to be recurring too.
Rising to the challenge
MiFID II is clearly more complex than its predecessor given that reporting requirements pull in more complex and less standardized financial instruments, across asset classes which historically have traded in a dealer-driven over the counter framework, i.e. via privately negotiated telephone transactions.
The fixed income markets and derivatives markets are being pushed to have a coherent pre-trade and post-trade transparency framework around trade execution. By imposing new transparency rules around the publication of bids and offers, as well as the details of executed trades, is likely to have quite a big negative impact in terms of trade life-cycle efficiency.
Going forward
MiFID II milestones include the start of the formal approval process this summer, an FCA MiFID II conference in October, and a formal consultation addressing implementation in December.
The end of systematic risk?
It will be more than a half decade between the initial proposal and full implementation, but given the stakes are so high, a long lead time is necessary. Key is to get the calibration right in advance so as not to disrupt the provision of liquidity too significantly. That’s a particular concern at the moment, given some of the issues we’re seeing around liquidity in bond markets generally as a source of potential systemic risk.
According to a previous client, the U.K.’s Financial Conduct Authority, MiFID II is “designed to take into account developments in the trading environment since the implementation of MiFID in 2007, including advances in technology and gaps in transparency to investors and regulators. It is also a response to the financial crisis.”
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