MiFID II came into force on 3 January 2018. Now that the dust has settled, we are indeed seeing more transparency in the financial markets. At the same time, trading in financial instruments in OTC markets has become unattractive. Do investors also notice something of these changes?
02 Mar 2018
By Geert-Jan Kremer
OTC markets are drying up
It is clear that bilateral trade on the OTC market is drying up. The market fills the gap with new platforms. We see a clear shift from trade flows to the new Organised Trading Facility and more transparency in the quotation prices. I welcome that. MiFID II thus meets the desire to make trading more transparent for regulators. On the other hand, traders have to arrange their own connections to the new platforms, which costs time and money. This seems to be a problem for smaller parties. But fortunately, the investor (private individuals, institutional investors and financial institutions) does not notice very much, if anything.
Reporting obligation: country of origin decisive
Meanwhile, it is fair to say that the machine room for processing transactions has become much more complicated due to MiFID II. The Approved Reporting Mechanism, parties that have been approved by the regulators to carry out reports for third parties, is particularly affected by this. What is particularly complicated is that MiFID II looks at the country of origin of the traded instrument for reporting purposes. For example, if an financial instrument is traded via Chicago on behalf of a client and the underlying asset is listed on a European stock exchange, this transaction, even if it is executed outside Europe, must be reported in the country of listing.
Torrent of data
Due to the strict regulations and reporting requirements, there is a torrent of data with which supervisors seem to struggle to deal with. We have already seen this before with EMIR. It seems as if the supervisors think: first make sure you are compliant and then we see how it works in practice. The same applies to the discussion on no LEI no Trade. If a client does not have an LEI, it may be acted upon if the bank is given a power of attorney to request the LEI. This can also be interpreted as: when the LEI is in application but has not yet been delivered, we will just get to work. But anyone who acts without LEI, requested or received, is in any case irrevocably ‘doomed’.
What goes around comes around
Preliminary conclusion after two months of MiFID II: the regulation works as it is intended. Transparency is increasing and investors are better protected. As already predicted, the main bottleneck is the torrent of data generated by MiFID II. The regulators are fortunately learning from the past and are looking pragmatically at the consequences. However, this does not mean that we can lean back. Anyone who fails to be compliant with MiFID II can expect measures. And the regulator can always say: we told you so.