The following article was written by Adinah Brown, content manager at Leverate.
In 2004, the European Commission Financial Services Action Plan launched the Markets in Financial Instruments Directive, or MiFID, which subsequently morphed into MiFID II. This directive contained a total of 42 regulations that were intended to significantly change how the EU’s financial service markets operate.
January 2018 saw the launch of MiFID II, the European Commission’s directive aimed at bringing European financial markets into line from a perspective of transparency and fair competition. For all intents and purposes, the launch went smoothly despite member firms not being fully prepared for the status change. Across Europe, the IT departments of institutional banks and financial institutions reported that they were still preparing and yet, no major setbacks were reported in the financial media.
Set up in the shadow of the global financial crisis of 2008, MiFID attempted to put regulations in place to cover all aspects of financial transactions on the European markets. Topics ranged from fair competition between member firms to the protection of consumer rights and the disclosure of payments for financial research.
During 2017, the primary focus of the European administrative bodies and those of the financial market participants was aligned – to aim for a smooth transition to the new standards. Steven Maijoor, the chairman of the European Securities and Markets Authority, who led the roll out, reported that while no major glitches had been reported, the authorities were still on standby to deal with any possible anomalies.
In a report running in excess of 1.7 million paragraphs, European financial institutions are estimated to have spent almost 3 billion euros preparing for its debut. To further complicate the landscape, the UK’s planned exit from the EU has added a new dimension to the affect and influence of the legislation. Currently, with Brexit negotiations in full swing, it is far from clear how British financial institutions will be bound by MiFID II, if at all.
The real proof of MiFID II will be determined by the way in which it encourages competition between European member states and institutions. Currently, trade volumes in interest rate swaps have seen reduced activity as players jockey for position seeking advantages for their firms. However, equity volumes have remained constant, which can be viewed as a positive outcome of new regulations. Many financial investors have put their trust in auctions where they can submit limit bids within selected time frames.
In the debt markets it was business as usual, with no reports of lower trade volumes or reduced new debt issuance. It appears that institutions had run in-house simulations to prepare for the new regulations and these had prepared financial institutions to comply with the new rules. General reports were that corporate bond transactions had only taken marginally longer to fulfill, by a factor of several additional minutes per transaction. However, it is probably too soon to call the new directive fully implemented without issue and further checks will be required during 2018 before calling the changeover a total success.