MiFID II: Five months on
It’s been over five months since the Markets in Financial Instruments Directive II (MiFID II) came into effect.
As such, many have begun to wonder what impact the directive has had, on both investment firms and financial markets, and whether its effect on European financial markets has been as significant as previously thought.
What is MiFID II?
MiFID II came into force only briefly, on 3 January 2018.
In the wake of the 2008 financial crisis, MiFID II essentially seeks to improve transparency within financial markets, whilst also protecting investors.
In particular, the directive sought to implement key changes around how trades are recorded and how brokers communicate and interact with one another. This isn’t to say there haven’t been other notable changes. Investment research, for example, must now be separately paid for. Previously, investment banks could effectively bundle the cost of research and brokerage services together.
MiFID II also seeks to encourage trading on public markets, as opposed to trading on private markets, even if there are still ways that firms will still be able to trade privately. One of the most common ways to achieve this is through a systematic internaliser, which allows a bank or firm to complete their clients’ orders through their own capital. Such methods, however, are not without contention.
Though the goals of MiFID II are certainly noble, it took a lot of work to get the directive ready for release. With around 7,000 pages of content, the regulation has been a real challenge for many investment firms to come to grips with, and as a result, the jury is out as to whether all firms are fully compliant five months on.
Given the vast range of changes that came into effect with MiFID II, there was a general feeling that regulators would go easy on firms that were not in full compliance.
However, given that we are now five months into the new MiFID II world, it may be that time is running out for firms to get their MiFID II affairs in order.
For instance, the Financial Conduct Authority (FCA) has indicated that, in line with its business plan for 2018-19, it will focus its attention on the MiFID II compliance of firms, and whether the MiFID II rules are operating as they were originally intended.
As such, firms should expect to be compliant with all MiFID II items, including the new rules regarding “research unbundling,” best execution, and rules around high-frequency algorithmic trading.
Has MiFID II had any tangible impact?
While MiFID II has undoubtedly caused a headache or two for several investment firms regarding compliance, there is less certainty when determining how much of an impact MiFID II has had since its launch a few months ago.
For example, the Financial Times recently reported that there had been an increase in private trading within the French market since the launch of MiFID II, which was certainly not the intention of the directive. Equally, the report comments that there have been increased instances of trading via systematic internalizers, which again would not have been intended by the directive.
Ultimately, the full picture of MiFID II’s impact on European financial markets is unlikely to be known for some time as we need more data to reach definitive conclusions. In the interim, investment firms should continue ensuring compliance with the directive – regardless of its impact, it’s likely here to stay.
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