New Dawn in Europe as Mifid II Goes Live

The revised Markets in Financial Instruments Directive and Regulation, known collectively as Mifid II, will have a significant impact on nearly all aspects of and actors in European financial markets, and beyond.

From best execution through to trading obligations, reporting requirements, dark pool caps, bond-market transparency and the unbundling of research costs, European market participants have started 2018 by entering into a new—and perhaps, uncertain—environment.

“Implementation day is certainly not going to mean an end to questions about how the fund management industry operates in a post-Mifid II world,” says Nick Burchett, UK equities manager at Cavendish Asset Management.

Research is likely to be one of the earliest sticking points. Under Mifid II, firms must now charge separately for research and “unbundle” these costs from commission expenses. Firms have grappled with how best to go about doing this since final clarity on unbundling emerged from European lawmakers last year, but many are still struggling to forge a definitive path forward.

“Over the next few months we will see what is and is not working and what may need to be tweaked because of the operational challenges imposed which can cause inefficiencies such as the 30-day requirement of [research payment account] funds sweep,” says Jack Pollina, managing director at broker ITG. “We expect the industry to push the UK Financial Conduct Authority (FCA) to allow 30 days from month end in order to allow more accuracy with less stress on the process.”

Indeed, others have warned of a race to the bottom in research costs, which will be spurred by confusion and ambiguity as to the initial state of the research market. Russell Napier, co-founder of research platform Eric, says items such as cost “remain unclear, even at this late stage.”

“Mifid II has arrived and action must be taken. High-quality research is a valuable tool that can be used to meaningfully improve investor outcomes. Devaluing it could harm the end investor, in direct contrast with Mifid II’s ultimate aim,” he continues.

Outside of research, firms are also expected to struggle with certain requirements around trade surveillance, and both trade and transaction reporting. Late approvals and last-minute adjustments to requirements, such as the European Securities and Markets Authority (Esma) giving a six-month relief on the need to use Legal Entity Identifiers (LEIs) in trade reports, for instance, have created uncertainty, while the technology requirements to comply have been greater for some than initially estimated. For many, this meant a holiday period filled with work, rather than time off.

Regulators have said that while they expect every effort to be made to comply with the rules, they are unlikely to come down on firms immediately if full compliance is not achieved.

“I don’t think it would be the smartest strategy to set maximum enforcement capacity on non-compliance on the 4th of January,” Esma chairman Steven Maijoor told WatersTechnology in December 2017. While Esma is not responsible for enforcement in this area, national regulators have echoed this sentiment, with representatives from the FCA telling attendees at Waters conferences throughout 2017 that they will be lenient—if not entirely forgiving.

European market participants also have another deadline to contend with today, in the form of the European Benchmarks Regulation, which also goes live on January 3. This will introduce sweeping changes to how financial benchmarks are authorized, used and operated within the EU.