By the STBB Corporate & Commercial team
The markets in financial instruments directive (“MiFID”) is a regulation introduced to increase transparency across the EU’s financial markets and standardise the regulatory disclosure required for particular markets. MiFID II applies to market operators, investment firms, data reporting service providers and credit institutions providing investment services (only certain provisions apply to credit institutions). Currently in its second phase (MiFID II became applicable on 3 January 2018), this far-reaching directive has the industry scrambling in an attempt to guarantee the infrastructure needed to meet the new transparency requirements. MiFID II is intended to improve competition and investor outcomes in financial markets. Local asset managers that adopt MiFID II now will have a competitive advantage over those managers who drag their feet.
The main changes from MiFID I to MiFID II are the extended scope of products and activities (product governance), the prohibited payment and retention of inducements (general inducement rule), the unbundling of research, increased investor protection, the creation of the Organised Trading Facility or OTF (a new category of trading venue for non-equity instruments such as bonds, derivatives and structured products), more accountability for senior management, reinforced supervisory powers, a harmonised regime for third country firms and the increased scope of transaction reporting and transparency.
Under MiFID II, the post-trade industry is required to be far more transparent. The post-trade industry is where buyers and sellers of securities have trades approved, compare trade details, approve transactions, exchange ownership details and arrange for the transfer of securities and cash. Post-trade processing is particularly important in non-standardised markets like over-the-counter (OTC) markets.
Under MiFID II, gone are the days of being paid a flat brokerage fee for both research and execution. MiFID II’s “unbundling” requires brokers to price research and execution separately. The objective behind “unbundling” is to ensure that asset managers place trades with the broker best able to provide execution of that trade as opposed to research. The industry is expecting to see asset managers reassessing the content they receive, with many significantly decreasing their research budgets. This is set to have a negative impact on small and mid-cap brokers. Banks who are not market leaders will most likely let a number of analysts go, presenting the opportunity for those individuals/teams to create a boutique industry of specialization.
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