This January marks the one year anniversary of MiFID II’s implementation. The alterations to the financial sector that this regulatory framework proposes are vast in scope; one year on, it is worth questioning how effective these proposed changes have been. Has MiFID II significantly impacted the financial sector? And if so, will it continue to do so in years to come?
Perhaps the most frequently cited change that MiFID II made as to how financial firms conduct their business is best execution. These best execution regulations were laid out in the Regulatory Technology Standards RTS 27 and RTS 28. These stated that firms must take ‘all sufficient steps’ to ensure that the best deal is made on behalf of the client.
The phrase ‘all sufficient steps’ has been given incomparable focus both by the financial media and financial firms themselves, but it seems that firms are struggling to implement the necessary measures to achieve this goal. A recent survey conducted with 100 capital markets firms from across the UK and Europe, 29 percent claimed that best execution posed the biggest challenge to following MiFID II’s regulations, while a majority 65 percent stated that they had ‘no adequate or systematic method in place to monitor trades in accordance with best execution criteria’.
With that being said, there is no need to be overly pessimistic about the future of MiFID II’s best execution guidelines. This year of struggling will likely have demonstrated the importance of investing in the regulatory solutions necessary to adhere to MiFID II’s strict guidelines. As time moves on, firms will only become more and more capable of being MiFID II compliant.
Another key focus of MiFID II is transparency with regards to regulatory reporting. These measures are intended to ensure that executing firms make detailed records of any and all trades, so as to increase the transparency of the market and deter market abuse.
However, as mentioned in a previous eflow blog post, a great deal of misunderstanding has pockmarked many firms’ attempts to increase transparency. Ambiguity about how to correctly file reports, inconsistent ISINs, and confusion about the culpability of third-country firms has led to a swathe of unacceptable reports being rejected by national competent authorities across Europe.
The consequence of this confusion surrounding transaction reporting has led some to believe that there have been a shift towards trading on alternative venues – a move which greatly undermines MiFID II’s authority as a piece of financial regulatory legislation.
If this is to be avoided, and firms are going to gain a better understanding of how to correctly file transaction reports so as to increase market transparency in 2019, these uncertainties must be cleared up by firms, national competent authorities and ESMA alike.
All in all, a year on from its implementation, the true impact of MiFID II is still yet to be seen. Whether or not it will ultimately leave the financial sector in better shape than it found it has not yet been decided.
What cannot be denied, however, is the fact that it has and still is significantly altering the financial landscape. In an ideal world, these changes will eventually lead to a more transparent, reliable and competitive market as firms begin to better understand the nature of the changes that MiFID II has implemented. What’s more, despite uncertain results 12 months in, there does exist a sense of hope throughout the industry that this ideal might eventually become a reality.