The reformed version of the Markets in Financial Instruments Directive, MiFID II, went into effect today. To mark the occasion, we’ve compiled a short introduction on what it is and what’s happening now that it’s in effect.
What is MiFID II? A mountain of rules
MiFID II is a comprehensive set of legislation that seeks to dramatically change how markets are regulated along with making them more transparent and competitive. The directive has rules on how data is both collected and shared, how brokers pay one another, price-setting, and even how asset managers pay analysts for research. In fact, MiFID II contains more than 1.4 million paragraphs of complex and sometimes unclear rules, and some of these regulations were finalised right up to today’s implementation. Hence, the wide-ranging financial entities this legislation affects, from banks and fund managers to pension funds and retail investors, have numerous regulations to adhere to. On top of this, EU member states were and are struggling to codify MiFID II in their respective national laws and/or regulations.
In the run-up to today’s launch, Bloomberg reported that U.S. and European banks were spending as much as USD 20 billion on technology for fixed-income brokers for MFiDII and other regulatory compliance measures. The Financial Times reports that implementation in Europe is costing the financial sectors more than EUR 2.5 billon, “with the largest banks spending more than [EUR] 40 million each on compliance”.
What’s happened so far
MifiD II’s rules are numerous and complex, and as such one would expect the launch to be quite chaotic; however, Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA), said that there have been “no glitches so far” from his regulation body, but that doesn’t mean problems will not crop up in the forthcoming days and weeks.
Regulatory bodies in the UK and Germany today have both given some 11th hour relief to Europe’s largest futures exchanges to provide them more time to implement the sweeping regulations.
Additionally, companies that are required to use LEIs—legal entity identifiers— were granted six-months to complete compliance as per a statement issued by the ESMA on December 20, 2017. During these six months, investment institutions are allowed to trade with clients without LEIs as long as they, before trading or delivering services, get the documentation to apply for an LEI on behalf of its client. However, according to Jake Green, regulation partner at London-based international law firm Ashurst, the measure could actually make compliance more difficult because some firms have already implemented compliance structures that automatically reject trades that do not have LEIs.
Besides regulators giving relief to parts of the financial industry, at the national levels EU member states are tasked with, as mentioned above, transpositioning the regulations. As of writing, 19 member states are facing pending infringement proceedings from the EC, 11 have communicated full transposition measures and six partial, while 11 have communicated no transposition measures.
If you are looking for more information on MiFID II and how it will affect Europe, you can direct your attention to PricewaterhouseCooper’s “MiFID II Pan-European overview”.