On 18 May 2016, the European Commission adopted a regulation to complement the new framework for financial instruments markets (MIF2). These changes stem from Europe’s desire to establish stronger regulations to regulate banking and financial activities. The changes introduced under the aegis of the European Securities and Markets Authority (ESMA) are aimed at making financial markets more transparent.
In the wake of Basel III and Solvency II, MIFID II brings changes that would be likely to transform practices within the banking and financial industry but with what consequences?
Review of the main changes in 5 points
First, the new European regulation aims to make transactions on the bond market more transparent. Transparency obligations relate to pre- and post-transaction elements. There will also be an expansion of products eligible for transparency (bonds, derivatives, structured products, etc.). In practice, transparency will be achieved in particular on the frequency of trading, the size of debt issues, liquidity providers and trading platforms. This transparency regime nevertheless proposes some derogations on several transactions (reference price waiver, negotiated trade waiver, large-in-scale waiver…)
The equity market is also affected by this new European regulation. The new text proposes the obligation to trade shares on regulated markets. The objective is to limit the proportion of transactions executed over the counter.
In the derivatives market things are also moving. Derivatives subject to a central clearing obligation will be required to be traded on regulated platforms.
The 2èmeelement that the European stock exchange policeman has tackled concerns high frequency trading.
The new regulation addresses the problem of this new practice around two objectives. The first is to improve the quality of the market by preventing potential risks associated with the development of new IT tools. The second is to guarantee the integrity of the markets by preventing manipulation through these technological innovations.
To do so, the Directive requires the introduction of a harmonised minimum tick size regime, a strengthening of the market-making framework (common minimum obligations), a framework for trading platform fee structures (transparent and non-discriminatory fees and services)
The 3èmepoint discussed by ESMA is related to action research. It concerns brokers who passed on research costs to end customers through management fees. Research funding was thus pooled for all or part of the transactions. But the European regulator wants to question this process. The new regulatory framework requires that the costs of carrying out research costs be uncorrelated in order to facilitate transparency and the management of the research costs charged to clients. Consequently, actors will have the choice of financing external research from their own resources or through a research payment account.
The impact that this text will have on action research raises many questions. Transparency and budget management will probably lead to a reduction in the budgets allocated to research. The various research consumers will be more concerned about the quality of the service purchased.
Le 4ème objectif de la directive vise à améliorer la traçabilité des échanges entre les clients et les différents acteurs financiers. This measure will lead to an inflation of regulatory obligations, particularly on customer knowledge, which will naturally increase the already high cost of these procedures.
Finally, ESMA also addresses the remuneration of consultants. This will affect independent wealth management advisors. Indeed, the Directive insists on the abolition of commission retrocessions from investment funds. Consequently, the service provider will be prohibited from retaining any monetary or non-monetary advantage from a third party. Independent advisors will also have to evaluate a sufficient range of financial instruments available on the market. Their origin must be sufficiently diversified.
In the end, this new text aims at greater transparency for better control and more “reasonable” market activity. The stated objective is to prevent the abuses and shortcomings observed during the last financial crisis. The objective therefore seems laudable, but the real risk, moreover, put forward by many professionals, is the disappearance of the current economic model.
Nevertheless, it is said that with each new rule or standard created, actors are offered two new opportunities.
Pending the effective implementation of these measures, the actors must commit themselves to observe these new rules and recommendations: Dura lex, Sed lex
Ernst & Young