Mifid II regulations: the impact explained

Summary

MiFID II, a transformative European directive, is set to revolutionize financial markets with over 30,000 pages of rules. It aims to increase market transparency, with new requirements for brokers, fund managers, and trading venues. The directive introduces unbundling, separating charges for research from securities dealing, and calls for enhanced visibility in price formation to ensure fairer practices. The financial industry faces a 2.5 billion euro implementation cost, with the UK’s Brexit adding uncertainty to its enforcement. MiFID II represents both a challenge and an opportunity, reshaping the landscape of equity, bond, and derivatives markets.

Takeaways

• 😀 Method 2 is a major regulatory reform that aims to transform financial markets in Europe and beyond, with a seven-year development period and over 30,000 pages of rules.
• 😀 The implementation of Method 2 is estimated to cost the finance industry more than 2.5 billion euros, with large banks spending over 40 million euros each on compliance.
• 😀 All players in the financial markets are affected by Method 2, including banks, fund managers, exchanges, brokers, retail investors, and market intermediaries.
• 😀 Method 2 targets new market technologies like high-speed trading, which involves executing deals in fractions of a second.
• 😀 The reform is expected to bring significant changes to equity, bond, and derivatives markets, creating both opportunities and challenges for market participants.
• 😀 Transparency is a key focus of Method 2, requiring more visibility on pricing before and after trades and how prices compare to the broader market.
• 😀 One significant change is the push for unbundling, which forces banks to separate charges related to research from those related to securities trading.
• 😀 Unbundling could disrupt the relationship between fund managers and banks, potentially diminishing the value of research produced by banks.
• 😀 Independent analysts may see unbundling as an opportunity to get paid fairly for their research, while some bank analysts fear job cuts.
• 😀 The UK’s exit from the European Union in 2019 introduces uncertainty around how Method 2 will apply in the UK, with ongoing negotiations and unclear future regulations.

Q & A

What is Method 2, and why is it significant?

Method 2 is a comprehensive financial regulation reform in Europe, designed to restructure trading and markets. It is significant because it impacts a wide range of market participants, from banks to retail investors, and it aims to increase market transparency and address concerns like unbundling of research costs and high-frequency trading.

How long did it take to develop Method 2?

Method 2 took seven years to develop, highlighting its complexity and the extensive consultations and deliberations involved.

How many pages and paragraphs of rules does Method 2 comprise?

Method 2 spans thirty thousand pages and contains over 1.4 million paragraphs of rules, underscoring the extensive nature of the regulation.

What is the expected cost of implementing Method 2 for the finance industry?

The finance industry is expected to incur over 2.5 billion euros in costs to implement Method 2, with the largest banks spending more than 40 million euros each on compliance.

Which market participants are affected by Method 2?

Method 2 affects banks, fund managers, exchanges, trading venues, high-frequency traders, brokers, pension funds, retail investors, and all other intermediaries between buyers and sellers.

What new market technologies are regulators targeting under Method 2?

Regulators are focusing on new market technologies such as high-speed trading, where deals are executed in fractions of a second, with the goal of increasing transparency and control.

What changes does Method 2 introduce to market transparency?

Method 2 introduces significant changes to market transparency, requiring more detailed reporting on prices before and after trades, as well as comparisons with the rest of the market to ensure fair price formation.

How does Method 2 affect the relationship between fund managers and brokers?

Method 2 provides fund managers with greater visibility into why brokers choose certain exchanges over others, which was previously unclear, aiming to ensure brokers act in the best interests of their clients.

What is 'unbundling,' and how does it impact fund managers and banks?

'Unbundling' refers to the separation of charges related to research from those related to securities dealing. This change has sparked a dispute between fund managers and banks, as it affects how banks charge for research and may challenge traditional revenue models.

What are the potential impacts of unbundling on bank analysts?

Bank analysts are concerned that unbundling could lead to job losses, especially for those focused on producing research. However, independent analysts may benefit, as they could be paid fairly for their work under the new system.

How is the UK's departure from the EU related to Method 2?

The UK’s exit from the EU in 2019 raises questions about how Method 2 will be applied to the UK financial sector. While the UK hopes to maintain the Method 2 arrangements, the specific regulations that will apply post-Brexit are still uncertain and under negotiation.