I recently spoke at Bloomberg’s Winning Strategies and Market Liquidity Conference in London. In my Key note speech one of the topics I covered was how regulation is set to change the asset management industry, specifically looking at Markets in Financial Instruments II (MiFID II). This blog is based on my speech and explores MiFID II in further detail.
The asset management industry has seen a huge amount of regulation in the past few years – AIFMD, UCITS, Solvency, the list continues. These rules have been created to make the industry more robust, create better oversight by governing authorities and ensure increased client protection and interaction. However, out of all the new frameworks, MiFID II is going to have the biggest impact to all of us in the industry – from brokers to asset managers. For example, UCITS funds will be affected on passporting, AIFs on depositaries, and RDR will ban inducements – to name but a handful.
MiFID II will have four cornerstones. The first will be creating more liquidity in the market space, and as a start, trading in bonds will become as transparent as trading in equities – by disclosing pricing information. Whilst this trade transparency is good for investors, it means additional reporting which may discourage dealers from offering liquidity, although the current proposal by ESMA is to defer reporting by a month. Personally, I think monthly reporting is too frequent and favour quarterly, but this is something for the regulators to assess.
The second cornerstone is on high frequency trading firms (HFT) which MiFID II will regulate. At the moment it isn’t quite clear what constitutes an HFT, although this is likely to become clearer with clarification from ESMA. There are still some ideas floating around on how HFT firms will be regulated, but this will most likely be dependent on how far the firm is located from the server. However, other options that look at volumes transferred per wire or overall trading volumes are being examined as well.
The third cornerstone affects clearing houses which will have further scrutiny by MiFID II. Specifically, they will be required to open up their services to third-party vendors, when at the moment they operate on an exclusive basis. These new rules will make firms specify why they demand exclusive access. The final cornerstone will surround market data fees. Currently there are a lot of disproportionate fees in the market which ESMA is looking to make more transparent.
Other aspects of MiFID II will look at external controls reporting, internal controls and governance, market transparency and investor protection. These changes will no doubt require firms to increase their investment in IT infrastructure and demand stronger record keeping and internal reporting. The new rules will also increase the power of compliance officers, giving them more influence to make recommendations to the board. The board itself will also need to justify its members and ensure that they understand the business and industry, which includes having suitable qualifications as well as fixed limits on board membership.
ESMA is still to conclude its consultation on MiFID II but whatever the results, they will be aimed at making market structure more robust, improving market transparency for investors and giving investors higher levels of protection. The subsequent legislation will impact every corner of the financial community and businesses need to know how they will be affected and what changes they need to implement to become MiFID II compliant and ensure regulatory reporting does not hinder the pace of their business.