26 October 2015•Update: 27 October 2015
By Andrew Jay Rosenbaum
ANKARA
An upcoming EU finance package known as MIFID II is set to radically change the way financial services companies do business around the world.
The EU's Markets in Financial Services II (MIFID II) directive, a package of legislation with more than 100 provisions, is close to its final shape since the European Securities and Markets Authority (ESMA) published a third draft of the package on Sept. 28.
When the directive is approved, it "will have significant and wide-ranging implications for the operations, conduct and governance" of financial services firms, consultancy Deloitte said Friday in note on its website.
Regulators in the bloc’s 28 member states are already preparing for its implementation. However, MIFID II will not just be a game changer for European banks, brokerages, asset managers, and investment funds. Countries like Turkey, which must harmonize legislation with EU, must prepare for the changes as well.
Moreover, the demands for increased transparency in dealings will affect the financial services industry in every country which does business with Europe, Deloitte pointed out. For example, access to European financial markets by non-EU banks will be carefully regulated.
“To say that MIFID II will change the way European markets operate in future is without doubt hugely underplaying the likely impact of this legislation. From new transparency regimes for equity and, for the first time, non-equity trading, regulation of new entities like Organized Trading Facilities [platforms for off market trading] and authorization of firms utilizing high-frequency trading to strengthened conduct of business requirements and disclosures, to caps on dark trading of equities and positions limits for commodity derivatives, all will be changed,” David Lawton, director of Markets Policy and International at the U.K. regulator Financial Conduct Authority, said in a speech on Friday.
What is MIFID II?
In 2007, the European Commission issued its first directive regulating markets in financial services, known as MIFID.
MIFID II is a comprehensive revision of MIFID to improve the functioning of financial markets in light of the financial crisis and to strengthen invester protection. While the directive is expected to be approved by the European Commission by January 2016, changes are expected to take effect from January 2017, and only then the new legislation will be known as MIFID II, explained London-based financial services law firm Simmons & Simmons, in a note.
"The first MIFID established a pan-European framework for the provision of investment services and the operation of markets. However, recent events and market developments have demonstrated weaknesses in some of the underlying principles of MIFID, exposing gaps in the regulatory framework, and highlighting areas which need reinforcement or revision. MIFID II is aimed at closing these gaps in order to bolster investor confidence and achieve all of MIFID’s original objectives," the London law firm explained.
What will MIFID II do?
In his speech, Lawton warned financial services firms to be prepared for changes in how they do business. For example, asset managers and investment funds must disclose information about trading in securities when it is made outside of stock markets or other regulated exchanges, Deloitte pointed out.
When MIFID II gets implemented, trading in foreign exchange and derivatives will be subject to more intensive disclosure requirements; the financial package will also put limits on how much trading in a stock can be done in a "dark pool" (a privately owned exchange). These are extensively used by banks and brokerages all over the world.
Also, high-frequency trading, which uses computers to make hundreds of trades in a few seconds, will be subject to specific regulation; investment managers or financial advisers will be banned from accepting any payment linked to the promotion of specific products; the ways in which mortgages and other debt are used in more complex financial instruments like derivatives and securitizations will be more closely regulated.
But these are just a few of the many changes MIFID II will put in place.
In an October 2015 survey of financial firms by Deloitte, a large majority of respondents agreed that the changes imposed by MIFID II would be one of the most important factors affecting their strategy in the coming two years.
After the European Commission’s approval, which has three months to review them, the European Parliament and the European Council may propose revisions. But most experts agree that only minor changes will be made to ESMA's final draft. As a result, it is up to financial services firms everywhere to prepare for the consequences.
