Word on the web: MiFID II era dawns

MiFID II rolls out while European regulators hand out last-minute reprieves
by Jake Matthews

One of the biggest shake-ups of financial services in decades occurred on 3 January 2018, but not for everyone, writes Lucy White in CityAM

Financial regulators in the UK and Germany granted a trio of exchange groups – Deutsche Börse, Hong Kong Exchanges and Clearing, which owns the London Metal Exchange, and Intercontinental Exchange (ICE) – a reprieve from an element of the EU’s revised Markets in Financial Instruments Directive (MiFID II) after successful applications. MiFID II allows exchanges to apply for a delay, meaning these exchanges won’t have to comply until July 2020.  

White quotes a spokesperson for Deutsche Börse justifying their application: “Brexit is a game changer. We share sector concerns around financial stability with regards to the open access provisions.”  

The FCA confirmed that Ice Futures Europe and the London Metal Exchange had been granted delays on 3 January 2018. They took into account the “orderly functioning” of both before reaching their decision. 

German watchdog the Federal Financial Supervisory Authority came to a similar conclusion with Eurex Clearing, owned by Deutsche Börse. 

The London Stock Exchange will see the FCA’s decision as a setback, according to White. She describes them as a “fierce advocate of open access [who believe] MiFID II would cause a ‘revolution’”.  

City AM article
Stopping ‘peppercorn prices’ On 2 January 2018, the day before MiFID II came into effect, the co-founder of research platform Electronic Research Interchange, Russell Napier, called on the FCA to stop “peppercorn prices”, reports Yoosof Farah in Citywire

Napier said that research costs are still unclear. Numerous investment firms have financed their own MiFID II research, but many are yet to finalise a price with brokers. 

Farah quotes him as saying: “While fees for a range of research services have suffered downward pressure since this time last year, peppercorn prices are unacceptable.” 

If the FCA acts, Napier estimates that it could take 18 months for an intervention. He wants action sooner rather than later to “ensure a fair value for research”. 

He calls “high quality research” a “valuable tool” that, when utilised well, can improve investors' outcomes. 

“Devaluing it could harm the end investor, in direct contrast with MiFID II’s ultimate aim,” he warns.  

Citywire article
The first day of MiFID II There were no major disruptions on 3 January, according to Huw Jones and Alasdair Pal in Reuters

Jones and Pal cite various sources in their article. Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA), told reporters that there were “no glitches so far”, while City of London Markets trader Markus Huber said there was “no difference compared to a regular day”. 

A reason for this is that, before Christmas, ESMA allowed companies additional time to comply. Although, due to the complexity and size of the reform required, glitches in the days or weeks ahead could not be ruled out by Maijoor. 

However, this doesn’t mean that there may be disruptions further down the line. KPMG’s head of capital markets Harps Sidhu cautioned that “MiFID II isn’t done” and that “people are at various stages of readiness”. 

One of MiFID II’s main objectives was achieved though: to shift stocks, bonds and derivatives from ‘dark pools’ to ‘lit’ ones, where everyone can see the price on offer. 

A trader from “one of Europe’s largest inter-dealer brokers” confirmed that public trading had increased in volume on Wednesday. 

Now that fund managers are required to pay for research from investment analysts, research reports fell by a third, according to “a fund manager at one of Europe’s largest asset managers”. 

Reuters article
More MiFID II lessonsDespite the buildup and dire warnings, 'MiFID II day' turned out to be more of a “whimper”, writes Sophia Horta E Costa and John Glover in Bloomberg

There were light trading volumes in equity and other asset classes on 3 January, which Costa and Glover attribute to people “tiptoeing around problems including price discovery and transaction reporting”. 

Europe’s biggest stocks saw a 13% drop in trading when compared to the 30-day average. This may be due to the New Year holiday, but the US was “very busy” on the same day. 

Similarly, and what Napier feared, research providers cut the charges for investors who want to read their publications or speak to their analysts. 

Perhaps unsurprisingly, the world of financial services keeps turning with MiFID II in the picture. Regulators have, thankfully, shown leniency in this matter. The effect has not been as seismic as some predict, but, as ever, watch this space. 
Bloomberg article

Seen a blog, news story or discussion online that you think might interest CISI members? Email jake.matthews@wardour.co.uk.
Published: 05 Jan 2018
  • The Review
  • ESMA
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