Lessons learned from MiFID and the wider impact of MiFID II

From new trading venues to greater transparency, and from greater investor protection to the need to demonstrate best execution, the requirements of MiFID II are multiple and far-reaching. This major piece of financial regulation, although European in origin, will have effects across the financial services industry within the European Union and well beyond its borders. 

As businesses and financial institutions are rapidly preparing for implementation on 3 January 2018, our MiFID II Market Readiness Report brings together insights from nearly 5,000 senior regulatory and compliance staff across the world.

The result is an insightful and detailed view into the challenges and potential benefits of MiFID II.

MiFID cost more than expected, took longer than expected to implement, required more resources and highlighted the need for a flexible business model.

MiFID was adopted in 2007. However, the financial crisis revealed that it did not go far enough in achieving its goal of underpinning the single market in investment products and services. Nonetheless, MiFID did break new ground and respondents felt that they learned some lessons from it, which can be applied to its second iteration, MiFID II. 

Across all areas and all regions, our survey respondents deemed that MiFID II’s impact would be positive for: investor protection, HFT trading and record keeping, best execution, pre- and post-trade transparency, APA and data collection, research unbundling and permissioning, transaction and trade reporting, SI determination, regulatory change automation and mapping, trading and trade matching.

Asked which areas they considered they were successfully managing in relation to implementing MiFID II, on average their responses suggest that they feel their performance leaves room for improvement in all areas.

So what benefits would MiFID II bring respondents’ organizations? Better investor protection and improving transparency of financial markets headed the list. If this proves to be true then MiFID II will have achieved two of its overarching aims. 

We asked whether various stakeholder groups would benefit or be disadvantaged by MiFID II over the next three years. In general, a strong majority felt that MiFID II would benefit those groups, with very few saying that they would be disadvantaged.

One of the bi-products of MiFID was that it led to an increase in the number of technology and service providers in the financial services market. So therefore, what impact would MiFID II have on the number of fintech and regtech companies in their respective countries? 

To clarify, fintech describes “the evolving intersection of financial services and technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investment and even crypto-currencies like bitcoin”. Regtech “consists of a group of companies that use technology to help businesses comply with regulations efficiently and inexpensively”. 

The overwhelming majority of respondents thought that the number of fintech and regtech companies would increase in their countries over the next three years. 

Lastly, respondents believed that MiFID II would have a variety of impacts on non-equity instruments such as real estate and commodities, though in this research we haven’t had the scope to probe whether other regulatory measures such as the Alternative Investment Fund Managers Directive (AIFMD), European Market Infrastructure Regulation (EMIR) and Undertakings for the Collective Investment of Transferable Securities (UCITS) would play a hand in producing similar impacts. 

The wide scope of MiFID II means that our respondents have no shortage of areas to invest their compliance spend, from boosting investor protection and accessing new trading venues to ensuring greater transparency and demonstrating best execution. One common element in many of these challenges is data.

To comply and operate efficiently in a post-MiFID II world, organizations will need to be able to create, access, absorb and aggregate data from a variety of sources. Yet 60% of respondents said they did not have all the data they need. Key challenges named by respondents were the sheer volume, complexity, sourcing, reconciling and reporting of data. 

Despite the range of concerns and costs, our report revealed that it will be worth the effort. Just over two-thirds of respondents believe MiFID II will be of overall benefit to their organizations, with this figure rising to three-quarters among those most knowledgeable about the coming regulation.

The greatest benefits identified were better investor protection and improving the transparency of financial markets.

While our MiFID II Market Readiness Report highlights some serious issues, there is also evidence that these are being addressed, with more money, time and effort going into compliance. There is also recognition that, despite the initial pain, MiFID II will put the industry and its customers on a stronger and more secure footing.

It’s important to remember that compliance is not purely a defensive play; having everything in the right place and ready to go can provide a competitive advantage.

As a recognized leader and trusted ally in the market, Thomson Reuters is strongly positioned to support organizations as they address the complex data needs and solve the key data challenges of MiFID II.