Why there is nowhere to run from MiFID II

hiding from MiFID

The following article was written by Adinah Brown, content manager at Leverate.


So you’re thinking that perhaps you can escape from beyond the grasp of MiFID II? Well you can’t because it’s going to affect everyone, and by everyone we’re including little Johnny’s savings account to Aunt May’s pension fund. And here’s why.

What is Mifid II?

MiFID II refers to the EU’s formidable and wide ranging regulatory reforms. With a name that’s never going to be at the tip of your tongue, ‘Markets in Financial Instruments Directive’, you can see why most people keep to the acronym. Revised from an earlier version, MiFID, take 2, is intended to offer greater protection for investors, inject more transparency into the entire industry, update existing rules so that they are up to date with technological developments and tackle under regulated areas of the financial system, which generally refer to the off-exchange markets of bonds and derivatives.

Why you may want to run beyond its reach

Filled with over 1.4 million paragraphs of legislation, this extensive rule book is enormously complex and not yet finished being converted in to local regulation standards, by more than half of the EU’s member countries. All in all, making it quite a challenge for many brokers to identify even how the new rules are supposed to be implemented.

Furthermore, buried deep into the regulation, are the highly prescribed methods for reporting. Investment institutions will have to not only report more information, but more rapidly. Trades will need to be time stamped, potentially at a rate of up to 100 microseconds and transaction reports will each contain more than 65 fields of required data. All of which must be stored for a minimum of five years, recordings of phone conversations, for seven years. Financial firms will also have to demonstrate that the prices quoted to clients, were the best available price for their trades.

With the overall objective to push trading away from phone to electronic mediums, data will need to be stored in petabytes, so to facilitate more comprehensive audits and surveillance records.

A controversial, if not greatly complained about section of the legislation is the way that asset managers will now be required to pay for their research. Up to now asset managers received research from analysts to inform their investment decisions. While information was provided for free through written reports and telephone calls, in reality the cost was built into the trading fees, and then passed on to the asset manager’s clients. Now that MiFID II is coming into effect fund managers will have to “unbundle” this fee into two separate budgets for trading costs and research respectively.

This will provide long term institutional investors with more material to determine if their brokers are on the ball in giving well researched advice. However, this may also back fire as fund managers turn to alternative markets in which to execute their trades. Much like they turned to equity “dark pools” after the release of the original MiFID.

How far reaching is its grasp?

MiFID’s relevance pertains to almost all financial markets including equities, commodities, fixed income, futures, currencies, exchange traded products and CFDs. The implementation of its standards is relevant to anyone in the financial industry, from banks, exchanges, fund managers, trading venues to brokers, high frequency traders, retail investors and pension funds.

Across this broad spectrum, the copious number of rules cover all aspects of investing in the European Union. To the extent that if a fund manager buys any type of underlying asset that is listed in the EU, such as a Saxo Bank option in Dubai, it falls under the jurisdiction of MiFID, irrespective of where that fund manager is operating. Likewise, an investor in the EU purchasing shares in Apple, would also pertain to MiFID II rules due the US Company having a secondary listing in Germany.

The European Parliament’s demand for high transparency reporting is chaffing up all too closely against privacy rules of other global regulators, least of which is ESMA. US brokers are perturbed by the new requirements for research payments. According to SEC regulations, only formally recognized investment advisers are able to receive direct payments for research. A regulatory divergence that potentially threatened to remove the ability of US brokers to provide research to their European clients.

The outcome of this extra-territorial inconsistency is that the SEC brokered an arrangement with the European Commission whereby research and execution can continue to be combined into a single commission, provided that the MiFID II regulated recipient can identify the amount of the fee that is attributable to research. The EU broker must also be able to demonstrate for each client the amount spent on research from the relevant non-EU broker. For the EU broker, this means another data point to be broken down for reporting. For the US broker, it’s a precedent for which they may be expected to eventually fall in line.

What’s likely to happen when doom’s day arrives?

Officially doom’s day is January 3rd, 2018, a date which undoubtedly is imprinted into the minds of money managers everywhere. Yet, as to whether the world will internally collapse seems unlikely. Aside from the fact that this writer is uninclined to exaggerate, the reality is most brokers, firms, institutions and national regulators themselves, are fortunately for some, deplorably underprepared.

You may not be able to run from MiFID II, but with any luck, you might be able to beat the financial world to it.

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