This Saturday, City workers will be able to celebrate surviving through one month of a dreaded new regulatory environment.
Bankers, traders and fund managers were welcomed back from the Christmas break – if they were lucky enough to have one – by the second Markets in Financial Instruments Directive, or Mifid II, touted as the biggest regulatory shake-up in a generation.
Though the new rules had laudable aims, to help increase transparency, reduce costs for investors and minimise market misbehaviour, many across the financial services industry were worried about how this would affect their jobs.
A month on, the clues are beginning to emerge as to whether these fears were justified.
Mifid II spread its tentacles across all areas of capital markets, from investment research to the intricacies of trading.
But some changes have been more measurable than others.
Certain rules attempted to make the world of trading much more transparent, moving business out of “dark pools” – where trades can be executed without being revealed to the market – to regulated exchanges.
Systematic internalisers (SIs), or investment banks which execute client orders between each other using their own money, have seen their business rocket as dark pool trading volumes have theoretically been capped and opaque broker crossing networks have been banned.
Who are the winners?
These SIs have clearly been one beneficiary of Mifid II – exchanges have even worried they could steal their business. But some of the large investment banks which also offer research will have won in other ways too.
Another aim of Mifid II was to make the investment research market more competitive. It introduced an “unbundling” requirement for fund managers to charge analysts for research, rather than receiving it for free in return for supplying brokers with trading business.
But according to Bobby Johal, of compliance business Cordium: “The regulatory ambition to see a new, fragmented market of smaller high quality providers is yet to be seen.
“If anything, the reverse is true. Firms have reverted to a small number of tried and trusted players in fear of contravening the ban on unsolicited research.”
And the losers?
It is hard to tell yet how drastically firms will have been affected by the shake-up, and how much they may still innovate to stay ahead.
But Raymond Groen int Woud of Kneip, a platform which helps fund managers comply with regulation when they market and report on their funds, thinks firms that left it too late to think about Mifid II will have struggled at the beginning of the year.
“What we actually observed was a sprint during the last few weeks of 2017 to have the target market information and cost disclosures ready,” he said.
These provisions aim to make it clear to retail investors whether a fund is aimed at them, and allow them to see exactly what they are paying in fees.
Many fund managers have underestimated the difficulty of standardising dates and times, Woud believes.
“We will continue to see teething issues with regards to Mifid II for a short while,” he said. “While some distributors may have given asset managers the benefit of the doubt, if an asset manager is not able to be compliant with Mifid II they are likely to see a drop in sales as well as regulatory compliance issues.”
What does the next year hold?
“We’re now getting to the interesting part of the Mifid II regulation as market structure adjusts to meet the new rules,” said Steve Grob of trading technology firm Fidessa. “Doubtless this will create new categories of winners amongst those firms who can predict these changes and invest accordingly.”
When City A.M. spoke earlier this week to Conservative member of the European Parliament Kay Swinburne, a key author of the Mifid II rules, she revealed that many compromises had been made.
Already the European Union institutions are starting to think about a Mifid III to iron out the creases as they are becoming evident, though she thinks any tweaks will likely be left now until after Brexit.
Until that time, market participants will be left with how to battle with the “best execution” requirement – which demands they prove that they have got the best price for their clients.
“We would also expect to see changes in market participants’ behaviour as the best execution obligation is extended to the buy-side and into other asset classes,” said Grob.
Fintech firms have been springing up to help address this challenge, which in turn is providing a host of acquisition and consolidation targets for larger incumbents.
However the trends play out, 2018 looks set to be a busy year.