How Will MIFID2 Impact the Financial Services Sector?
What is MiFID II?
This directive, alongside the Regulation on Markets in Financial Instruments and Amending Regulation, or MiFID, is the beginning of a legislative framework that hopes to regulate financial markets across Europe. This set of directives was decided upon by the European Commission with the intention of extending the reach of the first MiFID that was passed in 2007.
Simply put, MiFID II seeks to further regulate the existing daily governance of trading venues that deal with financial instruments.
- Increased investor protection
- Increased market competition
- Increased market oversight
- Uniform market regulation
As this legislation is meant to restructure the fundamental basis of the current European financial market, it is imperative that all market participants are aware of the rules and regulations set to roll out in January of next year.
Because this legislation encompasses the entire financial sector, markets will obviously be shaky as the long- and short-term consequences of MiFID II are not yet known. The cumulative effects of sweeping regulatory changes cannot be fully predicted, which leaves market participants open to well-founded concerns over fragile market liquidity.
Near-term Trade Reduction
As financial firms are gearing up for the upcoming shift in policy following the MiFID II rollout, markets may experience a temporary decrease in trading. This is due in part to the reduced liquidity in fixed-income markets that will come as a result of increases in capital requirements on the sell side. As the time for MiFID II implementation draws nearer, there may also be an influx of new trading venues as well.
Capital Market Effects
Banks will be hit the hardest when these regulations are implemented due to the competing demands of MiFID II, CSDR and EMIR. Trade volumes will be subject to onerous requirements, and banks will experience an increased pressure from new market competition.
Investment Management Effects
Investment managers will be in a state of revolution as they gear up to comply with the more complex standards coming with the new legislation. Investment management firms can expect policy recommendations regarding mitigation of risk in fixed income markets as well as proposals for more rigorous testing of investments, limitations on illiquid securities and increased transparency within the market.
Until the MiFID II legislation is fully implemented, markets cannot know the full extent of its implications. In spite of this, there is no question that financial dealings across Europe are going to see broad and extensive changes for the remainder of 2016 and well into 2017.
By Lovisa Alvin