The coming of MiFID II: Who will be left out in the cold during the festive season?

Adinah Brown

Leverate’s Adinah Brown explains the inside perspective on what brokers, IBs and affiliates will face when MiFID II is implemented in just over two weeks’ time

MiFID II implementation likely to be set back even further

Many people believe that MiFID II, which will come into effect in 2018, will improve transparency in the financial industry and create a level playing field for clients, brokers, and affiliates.

The reality is likely to be far different and can result in onerous restrictions for smaller brokers who may be hampered from generating healthy returns for their clients. The heightened provisions for increased reporting under MiFID II does not have an equivalent parallel in any other industry.

In addition, small brokers will have to absorb the costs of transactions, conduct more of their own research and do not have the resources larger financial companies have to offset this disadvantage.

In addition, Introducing Brokers or IBs, affiliates and those in the category of “tied agents” may be restricted from enacting transactions and dealing with orders. Although on the surface, MiFID II seems like a welcome reform, there are a number of serious flaws that could potentially cripple financial services in the European Union.

What is MiFID II?

The MiFID II, or Markets for Financial Instruments Directive, is a response to growing concerns about unscrupulous brokers who may hide information from their clients and profit unfairly. Complaints from clients about unscrupulous interest charges and market manipulation encouraged regulators to expand their reach and demand greater transparency in the industry.

These new rules will impact buy and sell side players in the financial market, including brokers who work with forex, options, futures, CFDs, stocks, bonds and ETFs. MiFID II will also affect data vendors and service providers.

Companies will have to provide complete reporting of every transaction they make through approved reporting methods. The goal of the legislation, which will be effective as of January 3rd, is intended to make the financial industry more centralized.

How MiFID II Impacts Brokers

This increased reporting means more time and costs, especially for smaller brokerage firms. They will have to provide detailed information about every transaction, including pre and post-trade data.

What results is a double standard with these new regulations in the way in which brokerages and banks are treated. For example, large banks that execute retail trading are not required to provide the same kind of pre and post-trade data that brokers do. In addition, other industries are not required to reveal all of their costs and other information before and after selling goods.

The rules require that information about these trades be reported immediately or “as soon as electronically possible.” Not only does the MiFID II demand more from brokers than from banks, but the requirements for immediate reporting can hinder trading and can result in inefficiencies.

In addition, the rules will require asset managers to cover their own research costs rather than passing them onto their clients, and they will be prevented from offering free research in exchange for trades placed by fund houses.

Large brokerages in the U.S. do not face these regulations, and the extra rules for EU brokers will result in losing out to overseas competition. In order to compete, EU brokers will have to make cutbacks in other areas of operations, resulting in less efficiency, which will be harmful to the brokers and their clients.

The wording of MiFID II also implies a greater burden on brokers. The language of previous legislation was that financial companies had to take “all reasonable steps” to ensure execution for clients, but this phrase has been revised to “all sufficient steps.” The tightening of the language means that the regulators can now raise the bar when investigating transactions and can decide unfairly that the broker was at fault even when they take “reasonable” steps.

How MiFID II Impacts IBs and Affiliates

Introducing Agents (IBs), affiliates and tied agents will also be affected by the implementation of MiFID II. Tied agents are “tied” or are aligned with only one MiFIR investment firm, and it may receive instructions and data and can provide services, advice or place orders associated with that specific company.

The IB introduces new clients to the MIFID firm, and as long as the only role the IB plays is providing new clients, they will not fall under MiFID II regulations. However, the new law strictly limits this role to introduction. If IBs and affiliates undertake additional tasks in their status as tied agents, such as facilitating transactions, they face a penalty for breaching regulations.

In addition, investment firms transgress t new regulations when they are given a fee or a commission from a third party who is not a client.

provision can severely disrupt the work of IBs and affiliates and can drastically limit the role they can play in the financial industry. The new law does provide an exception for IBs and affiliates who improve the service of the company, but this improvement will have to be demonstrated, which will lead to increased time spent creating reports and less time for providing services to clients.

The Future of Brokers, IBs and Affiliates Under MFID II

Although MiFID II was adopted to improve services to clients in the financial industry, the new regulations may create additional problems for regulators, brokers, IBs, affiliates and their customers.

The burden of intense reporting will increase the workload on regulators and may create obstacles for brokers who strive to execute efficient trades that serve their clients. The burden of information is not expected for banks who offer retail investment services or for other industries that provide products and services for customers.

In addition, the role of tied agents, IBs, and affiliates is called into question under the new rules and their future roles seem unclear. Even if the new regulations were well-intentioned, the outcome is not likely to be a smooth or pleasant one for either the industry and the clients they serve.

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