Word on the web: The MiFID II effect

Under the Markets in Financial Instruments Directive II (MiFID II), which came into force on 3 January 2018, some areas of financial services have been shaken up more than others 
by Bethan Rees

Under MiFID II, the cost of research has to be transparent and the provision of free research from sell side firms is no longer allowed. As a result, much of the financial services sector has had to reconsider processes, being more selective about the research it pays for. 

Fund management firms could be in for a big research bill shock at the end of the first quarter, writes Danny Lobo for Citywire. Lobo reports that the co-founder of Edinburgh-based Electronic Research Interchange (ERIC), Chris Turnbull, said that before MiFID II was implemented, fund firms did the bare minimum to conform with the unbundling rules to meet the deadline of 3 January. 

According to Lobo, Turnbull explained that this ‘bare bones’ approach didn’t give asset managers enough time to assess what research they need and how much they should be paying for it. He highlighted three areas that could cause some “nasty cost surprises”: invoice shock; broker voting; and no more trials.

Look out for more on the impact of MiFID II in the Q2 2018 edition of The Review magazine, out soon On invoice shock, Turnbull said: “Asset managers that have negotiated a basic price for written research may be unaware of the full costs associated with broker interactions they previously took for granted. The heavily discounted prices of basic access that some negotiated will unlikely include conversations had with banks’ analysts in Q1 2018. Premium research takes many forms, of which time with top analysts is just one.”

On broker voting – systems used by the institutional buy-side as a way to evaluate the ‘value add’ of research providers to their investment process – Turnbull said that some asset managers are “still using broker voting systems to determine who gets paid what for research consumed”, which is in direct conflict with the spirit of MiFID II. 

And on trials, Turnbull said that “the FCA has allowed three-month trials of research content”, but now firms need to decide which trials are worth adapting to contractual agreements. 

Citywire article
How to understand MiFID IITo help facilitate understanding of the monumental piece of legislation, a new report by regulatory think tank RegTech Council explains how regulations could be processed using “open standards-based semantic technologies” that show “how the impacts of a regulation can be documented and visualised in a way that permits the user to navigate from regulatory provisions to impacted activities … in an easy to use, open standards-based graph-based browser”, writes Tom Groenfeldt for Forbes.

According to Groenfeldt, the report states that success would require “collaboration among financial institutions in creating a common language based on human and machine-readable integrated regulatory and business vocabularies and rules.”

The council developed a proof of concept (POC) using MiFID II, showing the impact on an investment bank. The POC shows that it “is feasible to move towards a new paradigm in terms of how regulators write rules and how firms interpret them.” The report describes how benefits of such a concept are not limited to cost saving; it could also enhance data governance quality and help firms’ and regulators’ understanding of new regulation and the impact it can have on data, people and processes. 

But the report warns that digital technologies are not the only answer. “Both public and private sectors need to collaborate to build the common semantic-based regulatory and business knowledge bases that are needed to ensure the success of the new paradigm.”

Forbes article
Brexit takes precedenceThe regulatory change has meant a number of investment banks made cuts, and, in some cases, have made analysts redundant as a result of fund firms becoming more selective in the external research they use, writes Valentina Romeo for Money Marketing.

But big brokers are more concerned about dealing with Brexit-related issues than MiFID II, according to Caleb Hawkins, a senior consultant at Morgan McKinley, who is quoted in the article. 

He says: “We expected a greater volume of candidates leaving the large top tier banks, especially since the go-live of MiFID II. But the banks have moved the majority of people internally to focus on key regulatory projects, such as Brexit.”

Firms must get back on course, but with the need to prepare for Brexit looming ever larger, there is a risk that ironing out the teething troubles with MiFID II compliance will be put on the back burner.

Money Marketing article

Seen a blog, news story or discussion online that you think might interest CISI members? Email bethan.rees@wardour.co.uk.
Published: 06 Apr 2018
  • Compliance, Regulation & Risk
  • The Review
  • Mifid II
  • Brexit

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