A new report from GreySpark Partners, a leading global capital markets consulting firm, examines strategies that investment banks can use to assess the impact of the second iteration of the EU’s Markets in Financial Instruments Directive (MiFID II) on the profitability of their trade execution businesses.

Mastering MiFID II: Implications for Execution in Investment Banking explores how compliance with the EU financial markets directive carries with it a number of different trade and transaction reporting requirements, which all banks conducting business within the bloc must comply with or face fines levied by either the European Commission or EU member state regulatory authorities.

The GreySpark report explores the most challenging aspects for a bank’s equities, fixed income and derivatives trading businesses in achieving compliance with MiFID II’s trade and transaction reporting mandates. Specifically, the report examines:

·         the impact of MiFID II best execution mandates on the costs associated with carrying out trading activities for buyside clients or with other counterparties in the marketplace;

·         MiFID II’s creation of a new type of trading venue called an organised trading facility and the impact it will have on existing sellside systematic internaliser registrations;

·         the impact of new MiFID II mandates governing algorithmic trading;

·         the impact of new MiFID II rules designed to monitor the provision of direct market access services by banks; and

·         the challenges posed by a currently inconsistent proposed MiFID II regime for banks to synchronise the clocks that their trading systems use with the clocks used by trading venues for trade time-stamping purposes.

MiFID II’s trade and transaction reporting rules require banks to generate, store and report to the European Securities and Markets Authority vast amounts of new pricing and execution data related to every single equities and equity-like instruments, bonds or exchange-based or OTC derivatives trade that they carry out for their asset management and institutional investor clients, including trades executed by banks against their own balance sheets.

In complying with MiFID II, banks will be forced to shoulder a great deal of the business, operational and technology costs associated with managing these new volumes of data for their buyside clients. As such, these new costs will inevitably erode the profitability of sellside financial markets trading businesses, and banks may be forced to charge their buyside clients higher fees for trading services as a result. If so, then the need for some banks to increase their client charges for a range of already well-commoditised services could force sellside firms to confront a difficult choice: continue to compete with their peers for client market share, or reduce the amount of trading services they provide in an attempt to better serve their core client base.

Asif Abdullah, head of GreySpark’s Scotland-based consulting business, said: “Buyside firms, like banks, also have their own MiFID II trade and transaction reporting-related costs to worry about. Given the current pressurised environment within the buyside industry on fund management fees, asset managers and institutional investors will be naturally reluctant to accept increases in sellside charges and fees for the facilitation of trading services. As a result, both buyside firms and sellside banks must now look at more strategic solutions to deliver system and process efficiencies to manage these regulatory costs.”

Giles Broxis, GreySpark’s EU Risk and Regulations practice manager and report co-author, added: “MiFID II is set to change the sellside trade execution landscape from a business and operational perspective across Europe, putting pressure on profit margins across the board, particularly where business models are centred on high-touch or opaque trading business models. In a regulatory environment that remains uncertain, banks must now work out how to maximise the cost-savings benefits they can derive from the investments driven by regulatory compliance if they are to offset these challenges.”