With only a few weeks left until the end of the year (and the habitual software-freeze window, which kicks in even earlier) banks, asset managers and trading venues are facing the moment of truth: will they be MiFID 2 compliant come January?
The answer is no. At least not all institutions and certainly not in every aspect of the MiFID 2 legislation. It was always going to be an enormous challenge; important stages of the trade cycle being redesigned – none less – while the expectation was that business would carry on, as usual. Changes that touched virtually all players in the value-chain; from broker/dealers to custodians. Moreover, it has transpired that firms are not only applying the resulting changes to their European operations, but to those outside the EU as well – in order to ensure consistency in operations.
So where are the remaining issues?
MiFID 2 requires trading venues to offer smaller data packages than is the case now. Clients should be able to license only those data sets that they really require; no “regional” or “asset class” package of which up to 90% may remain unused. This, however, creates challenges on both the supply-side and the demand-side. Exchanges may not be able to disaggregate their data modules. There is the technical challenge of changing databases and permissioning systems, but there are also commercial and legal aspects to it: Data License Agreements need to be changed. Consumer firms should also be careful in what they wish for. With data modules from exchanges already running into the dozens per exchange (or more) administrating the results of security exchange data disaggregation could be a daunting task, if the right tooling is not in place.
Sell-side firms can no longer provide investment research for “free”; i.e. as part of the trading fees. So asset managers need to buy the said research services (or cancel them). It turns out that neither the supply-side nor the demand-side is fully ready yet. A frenzy of contract negotiations is taking place, but the question is, will it be done in time. What looks certain, though, is that asset managers will cut down considerably on the number of sources for providers of research. They simply won’t pay for all the information that is currently landing in their Inbox for free. This, in turn, means that sell-side research is undergoing tremendous change; whose services will continue to be in (sufficient) demand? As a minimum, banks will have to reconsider which kind of research they will continue to provide; specialise in regions, asset classes or a mix thereof.
There is more
In addition to this (and sometimes overlooked) there is the Benchmark (Index) Regulation. The European Regulation on indexes used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (the EU BMR) will also apply from 1 January 2018.
This legislation is primarily affecting the global benchmark index providers, who all seem to have got their act together. The smaller ones, however, may throw in the towel. For sure, banks that used to offer (benchmark) indices no longer can. They either sold their index business or stopped it altogether. The ones that remain, EU based administrators who have been granted authorisation or registration under the EU BMR, will perhaps see a slightly less competitive landscape ahead of them. End-user firms, asset managers in particular, may wonder how this will affect the commercial policies of the benchmark index providers, certainly now that they are using their data more than ever.
Please do not hesitate to contact us, if you require any additional information about MiFID 2!