Deadline day for MiFID II implementation is here. But make no mistake – this package of EU directive and regulation will continue to have a significant impact throughout 2018.
The impact of this EU package of rules will be so enormous on the markets and product providers that it’s likely that 2018 will be a voyage of discovery.
For example, new disclosures around best execution will begin to appear in April – a great sea of additional data that managers and brokers should then build into their own best execution evaluations of the venues and counterparties they use. MiFID II requires that firms do this – but it remains to be seen how well firms use this new information to enhance their trading activities and the transparency they provide to clients.
Then there’s the MiFIR transaction reporting regime; from today onwards any investment firm that does not have a valid Legal Entity Identifier (LEI) may find it difficult to trade. The six month’s reprieve granted by European Securities and Markets Authority (ESMA) on 20 December 2017 was intended to support the smooth implementation of LEI requirements. But with recent reports indicating about a fifth of investment banks’ clients not having an LEI – the essential tag they will need to continue trading – it is more of a back-handed concession by ESMA that clearly places additional burdens on investment firms, from the application process to obtain these LEIs to ensuring that historic transaction reports are submitted in a timely fashion once the LEI has been issued.
There will also be an increased focus on using the data generated by MiFID II’s transaction reporting – estimated to be more than one trillion data points each year – to tackle market abuse. The increased surveillance the FCA is expected to undertake using MiFID II transaction report information may cause firms to up their own internal insider dealing and market abuse surveillance, something that the FCA is keen to encourage.
While on the product side, the whole Product Governance and Distribution framework needs to bed in, as will new costs and charges and new PRIIPs disclosures for some. There is also now talk of a follow up to MiFID II. It is hard to see how the authorities won’t seek to standardise how data and information is disclosed between and across markets, product providers and distributors. Perhaps though “MiFID III” and the UK’s reduced (if any) role in its development post BREXIT will mark a clear decision point towards more centralisation or a step back from the seemingly voracious regulatory desire to consume data.
While the EU package of rules is enormous and in places problematic for firms, it is still much admired by supervisors around the globe, who see its enhanced levels of transparency and accountability as supervisory best practice. It’s therefore possible that other regulatory jurisdictions – including the US – may choose to implement chunks of MiFID II once the dust settles within the EU. Hong Kong has pledged to go down this road in parts, especially following its Fund Manager Code of Conduct, which will come into force in November 2018.
3 January 2018 is a date that has been etched on the minds of investment firms around the world, but MiFID II will be more Big Thud than Big Bang. The likelihood is that many firms, even where they have technically hit the 3 January deadline, or knowingly deferred it for parts of their programme, will find there is a lot of bedding down to be done. This will include fixing things that do not quite work and picking up on important disclosure and other new requirements that were left by the side of the road in the dash for compliance.