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Unintended MiFID consequences – Job losses and trade disturbances due to new rules News

Sunday, August 27th, 2017 | Economy

The revised Directive on Markets in Financial Instruments (MiFID II) aims to make markets more fair and transparent. It affects everything from the way financial companies act to the distribution of research products. Nevertheless, experts are worried that the hundreds of pages of regulations are covering problems that the supervisory authorities have never fully considered.
"The MiFID II bubble feels painful," says Gerard Walsh, Head of Equity Development for Northern Trust Capital Markets in London. "It's a bit like the UK is going to drive on the right side, it's going to make a difference, but finally people will adjust."
The following are only a few of the consequences of the new rule set, which the responsible persons probably did not intend:
Less research
One of the most controversial aspects of the new regulatory framework is the separation of banks, research and commercial services. A direct consequence could be that the expenses for analyzes fall as the buy side becomes more demanding. US and European fund managers are likely to cut their research budgets by more than $ 300 million, according to a Greenwich Associates survey.
This is equivalent to a 7% drop in commissions for European companies and 5% for US companies Wall Street banks may not be able to sell their US research to European customers because of the regulatory conflict between the two regions Before the January launch date of MiFID. It is forbidden in the US to require money separately for research, unless the credit banks register as investment consultants.
Job losses (and some job growth)
Less demand for research means less demand for analysts. McKinsey & Co. expects that the rule change will cost hundreds of jobs, as banks will cut research spending in the region by about 1.2 billion dollars. The top ten banks on the sell side are currently spending around $ 4 billion a year on research, but this will drop by 30 percent according to MiFID, the company said.
And this is an area that has maintained relatively well since the crisis: The number of employees in cash equity research has fallen by only 12 percent since 2011, compared to 40 percent in sales and trading. There is upward potential for a few lucky ones , As asset managers, including Schroders, are building their own research teams to balance the impact of MiFID. The Vanguard Group, the world's largest investment fund company, is also planning to rely more on internal analysis.
Special research houses
As banks are likely to reduce analysts, whole industry teams that are not ranked among the top three or four in their sector could disappear from the picture. Walsh from Northern Trust expects these teams to decide to go their own way. This is not just about low-ranking research staff: Three analysts of Barclays in New York should have gone and started their own boutique company.
Shrinking purchase lists
Since the companies must document the transactions in much more detail, there is a concern that MiFID II will have a dampening effect on sales in continental Europe. Banks and insurers that market funds could limit the number of asset managers they trade, which reduces the competition that EU supervisors actually want to promote. The consulting company Cerulli Associates from Boston says that southern Europe is likely to be the most affected.
… and shrinking investment universe
MiFID II requires companies that are involved in the distribution of investment funds to ensure that investors receive products suitable for them – defined as the "target market". Under the British interpretation of the rules, portfolio managers also have to meet this requirement because they are classified as product marketers.
"The rules could cause the universe to shrink in companies that the fund manager believes to be investing in," said Dick Frase, partner of Dechert law firm. "This means that they have to think about whether an individual investment decision, such as the selection of one stock in comparison to another, is appropriate for the target market." This makes no sense. "
Less business in London
London, which is already struggling with the aftermath of Brexit, is likely to become less attractive as MiFID II makes the city a more complex and expensive location for foreign investment managers. "New York, Boston, Hong Kong and Singapore are becoming more attractive," says Dechert partner Peter Astleford. Regulatory conflicts between systems will be a "discouraging factor" for about 5 to 10 percent to operate in London, he said.
trading volume
The trading of blue-chip stocks and derivatives in trillions of dollars could be exposed to turmoil due to the revision. Unless the EU acts quickly to ensure that its new rules have so-called equivalence with other systems around the world.
The world's largest lobbying group in the derivatives industry is pushing for a shift of MiFID II, while supervisory authorities in countries such as the USA, Switzerland and Singapore are hurrying to determine whether their rules are as stringent as in the EU. If the rules are not aligned, MiFID II could disrupt trading on platforms in these countries, fragment global markets and increase costs.
A global standard?
To make life easier and to make business more efficient, some companies are considering applying the MiFID II rule beyond Europe. BNP Paribas Asset Management plans to follow the principles worldwide and says it would be "extremely complex" to distinguish between portfolios that fall under the new EU rules and others. Fund managers in the US are thinking about pricing, outsourcing research costs internally, and disclose these costs to customers, says Amrish Ganatra from the research payment processing platform Commcise.


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