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This article was first published in the September 2017 international edition of Accounting and Business magazine.

The Markets in Financial Instruments Directive (MiFID) and the accompanying Markets in Financial Instruments Regulation (MiFIR) come into effect in the European Union on 3 January 2018. They’ve been a long time coming. They spring from the aim of the G20 to regulate financial markets more rigorously. The first iteration, MiFID I, which was largely targeted at equities, was implemented in 2004. MiFID II aims to make financial markets more efficient and resilient, and to increase their integrity. It was also conceived as a measure to level the playing field in financial instruments across the EU.

Make no mistake, the new reforms are a major piece of regulation. ‘Any EU investment firm or third-country firm doing business in the EU will be affected by MiFID II,’ says Claire Wallace, a senior manager in PwC’s asset management regulation practice. ‘It is the over-arching EU regulation that governs the way in which investment firms are authorised and run. Every aspect of an investment firm’s business – from authorisation, product creation, selling, trading and execution – will be caught by MiFID II.’

Data challenges

Described more emotively by others as ‘the regulation from hell’, MiFID II is consuming vast amounts of resources in its implementation, both human and financial. This is because the principal challenges are largely around data – accessing it, applying it, storing it, retrieving it and reporting it, all of which demands technology and staff that are up to the task.

For example, market transparency is a major plank in the MiFID II structure. In order to achieve that in a financial instrument, a large number of quoted and actual trade prices need to be accessed, compared and analysed. This can be relatively easily done where instruments are traded on a recognised exchange, but data collection and reporting are more difficult when it comes to off-exchange trades between individual counterparties.

Best execution, another major MiFID II principle, is similarly data demanding. A fund, a bank or an asset manager must be able to prove that the best price possible in the market has been achieved at the instant of its trade in any financial instrument, say an equity, bond or derivative transaction. To do so, the organisation, or its service provider, has to be able to access all available data, analyse and report it as and when required. Such a process, though producing a fairer result for buy-side clients, requires huge data resources to achieve.

‘Unsurprisingly,’ writes Nick Bayley, managing director of regulatory consulting at corporate advisory firm Duff & Phelps, ‘a cottage industry of service providers has sprung up to offer solutions around MiFID II – in particular, a plethora of technology providers claim they can help firms handle the new requirements. Some of these are well-established names that have identified MiFID II as an opportunity to extend the scope of their existing services to meet clients’ needs, while many are niche providers offering a single solution to a particular regulatory challenge.’

If consultants, market experts and compliance firms are MiFID II winners, so are the data providers. Bloomberg, Thomson Reuters, SIX Financial and others that derive, handle, collate and recycle data see MiFID II as a major business opportunity. The requirement for their clients to access such data and use it in their reporting to their local regulatory authorities is mandatory, and therefore a one-way bet for the big data houses. There is a race to gain market share, and the chances are that the biggest fish in the MiFID II sea will be the biggest winners.

Problems for small firms

The Financial Times recently examined the MiFID II compliance issues for wealth management firms. Many such firms are small, do not have bottomless IT budgets, are tackling a regulation that lacks clarity, and are under pressure to provide transparency on their fees and charges, as well as their relationships with analysts and research providers. As the clock ticks down towards January, the consequences of Brexit are also looming for them. They do not know whether or how their business with EU-based clients will be affected if the UK is cut adrift from the single market in financial services.

The same can be said of brokers, fund managers, advisers or service providers to the wealth management industry. The upbeat argument is that agile firms that are quick to react and adjust to new regulation, and prepared to adapt their business model, will come out on top. But for small firms this may be easier said than done. It will be surprising if some do not leave the market or choose to spread the costs and the risks of MiFID II compliance by joining forces with others. Wide-scale consolidation looks inevitable.

In the end, the million-euro question is, will MiFID II achieve its objectives? Will this sweeping restructuring be worth it?

Ben Pott, group head of government affairs at Nex, the electronic markets and post-trade business (formerly ICAP), is taking the long view. ‘Over time we will see if MiFID II will achieve its objectives,’ he says. ‘People tend to overestimate change in the short term and underestimate it in the long term. That will certainly be true with MiFID II.

‘On day one there will be a lot of data out there but people won’t necessarily be able to make sense of it. Over time, as they are able to draw together data from different sources, and regulators have more data to calibrate the transparency regime, that’s when we’ll see some benefits coming out of this. I don’t think that will be the case in the first six months.’

Richard Willsher, journalist