MiFID II: For All or For None?
A year from now, a US fund manager will be watching the recently implemented Markets in Financial Instruments Directive II for its effect on trading, transaction reporting, and client service in European markets.
Three or five years from now, MiFID II might be a memory of a short-lived regulation, or else that same US fund manager will be dealing with a domestic equivalent.
“You cannot have an asymmetry in global markets as big as MiFID II,” said David Knutson, head of credit research at Schroders US. “Either they try it and it doesn’t work and we go back to the way it is now, or they try it and the U.S. eventually shrugs and says this is a good idea, we need to do this here too. If they don’t, it creates all kinds of inconsistencies and arbitrage opportunities.”
MiFID II is meant to go into effect on January 3, 2018. The wide-ranging legislation covers Europe, which holds about one-fifth of total global stock value, so most large trading and investing shops will need to comply for some portion of their securities transactions.
“MiFID II potentially has some big challenges for the global investment industry,” Knutson told Markets Media. “It hasn’t been part of the dialogue or debate in the U.S. as much as it has in Europe.”
One key provision of MiFID II would unbundle research from trading, which means asset managers will need to either pay for research from their own revenues or set up research accounts for clients with agreed-upon budgets. Most managers expect research budgets will stay the same or increase, though for many it’s not clear how research will be funded.
“As head of research, I need to understand what my budget is and how many analysts we need to produce alpha for my clients,” Knutson said. “If unbundling makes its way to the U.S., that is going to change research budgets and staffing needs. Those are big changes.”
Broadly speaking, “the default assumption is that MiFID II is some quirky overseas thing that won’t ever make it to the US,” Knutson said. “But in covering global banks I’ve seen — time and time again — the need for Basel (Committee on Banking Supervision) to synchronize global regulation in what is a truly global industry.”
Added Knutson: “It’s hard to believe that a French bank will have significantly different capital and liquidity standards than a US bank. It just won’t work.”
There are three key areas where action is required.
Some material changes have come out of ESMA’s review of algorithmic trading.
A consolidated tape will significantly improve transparency and create a level playing field.
AFME said there should be mandatory free data contribution to the consolidated tape.
The review is an opportunity to recalibrate MiFID II regulations post-Brexit.