MiFID II Will Make EU Less Attractive for Fund Managers
Asset managers believe that MiFID II, the new regulations covering financial markets in the European Union, could make the region less attractive for investment management activities, particularly with regard to market structure, transparency and research payment rules.
Deloitte discussed MiFID II with 15 investment managers and two independent external experts for a new paper, “Navigating MiFID II – Strategic decisions for investment managers.”
All but one of these managers believe that MiFID II will have the greatest impact on their strategy over the next two years.
The regulations will change how investment managers interact with the market. MiFID II introduces a new category of trading venue, the organised trading facility (OTF) for non-equities and pre- and post-trade transparency requirements for liquid bonds.
Deloitte said investment managers will follow liquidity and some managers thought there would be more high-frequency trading in bond markets. “In fixed income, most firms expect to trade more vis systematic internalizers and on trading venues, with many firms expressing a preference to trade on electronic platforms where possible,” added the report.
The number of systematic internalizers is expected to increase as most investment banks will set up as an SI in at least one asset class, and larger firms will do the same across multiple asset classes.
The majority of respondents expect MiFID II to reduce fixed income liquidity, and potentially lead to higher price for investors.
Two particular areas of concern are changes to way that fund managers purchase research and transition reporting.
The European Securities and Markets Authority has proposed unbundling research payments from dealing commission in order to avoid conflicts of interest. Esma has suggested that fund managers either pay for research out of their own revenues or set up research payment accounts for clients which have an agreed budget. The UK’s Financial Conduct Authority has created controversy by saying the new rules are incompatible with the use of commission sharing arrangements. The publication of the Delegated Acts, expected next month, are expected to provide further clarity.
“We expect the proposed rules to lead to investment managers increasing their scrutiny of the quality of research, with an accompanying flight to quality, and reducing their research budgets as the cost becomes more explicit,” said the report.
Deloitte also expects the changes to lead to a reduction in the number of sellside analysts and the exit of some independent providers.
Transaction reporting under MiFID II covers a wide range of asset classes, not just equities, and increases the number of fields that have to reported. The firms in the Deloitte survey said they will no longer delegate their reporting to brokers, with most reporting in-house and others undecided or preferring to outsource to a third-party provider.
“We expect there will also be demand for a third-party reporting solution, particularly among smaller investment managers for which bringing reporting in-house may not be a cost-effective option due to the technology implications,” said Deloitte.
However Deloitte does not expect MiFID II to drive any significant increase in outsourcing, although some standalone activities could be outsourced, such as transaction cost analysis or operating a research payment account.
MiFID II is expected to increase costs and reduce margins, which will be passed on to investors, and better absorbed by larger managers.
Deloitte suggested that to gain competitive advantage firms look at market consolidation, or changing product offerings and/or investment strategy. Another option is to use the significant amount of new data that will be generated under MiFID II.
“Investment managers that have multiple distribution channels and robust links with distributors will be in a strong position,” said Deloitte. “Investment managers should be continually looking to innovate, recognising that online, mobile and social media are becoming primary channels for consumers.”
In the survey most firms said they had completed, or partly completed, their MiFID II project initiation and most plan to be well into their implementation programmes by February 2016.
“With the 3 January 2017 deadline rapidly approaching and implementation programmes well under way, there is no time to lose in taking the necessary strategic decisions,” continued Deloitte. “In order to be market-leading, investment managers cannot focus purely on implementation, but must focus also on wider market and regulatory considerations.”
Esma released the regulatory technical standards for MiFID II at the end of last month. Both the RTS and Delegated Acts must be approved by the EU Parliament and Council before national authorities of the 28 member states implement their own regulations.
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