EVERYTHING YOU NEED TOKNOW ABOUT MiFID IIAND WHO IT IMPACTS

®

P R O F E S S I O N A L

P A R T N E R E D W I T H

WHI T E PA PER

weconvene.comV I S I T

The January 2018 deadline for compliance with MiFID II,

as the second installment of the European Union’s colossal

Markets in Financial Instruments Directive legislation is collectively

known, is rapidly approaching. For many in the global investment

services industry, it is crunch time in terms of understanding and

preparing for one of the most comprehensive regulatory overlays

since the 2008 global financial crisis. It’s a complicated topic that

has a number of implications for all involved in the corporate access

landscape. To help Corporate Access teams, IR professionals and

Portfolio Managers navigate the upcoming changes we will be

releasing a series of papers that will examine what MiFID II means

for Corporate Access; the likely impact on Investor Relations teams

and finally how the evaluation of Corporate Access and research

services by the buy side is likely to evolve. As a starting point

though, this paper will look at what MiFID II actually is,

the goals of the regulations and who they impact.

Broadly speaking, MiFID is a far-reaching series

of directives designed to increase transparency,

coordinate regulation, improve compliance and

boost supervision of financial institutions across

the EU. The goals are laudable – increased

market transparency and more investor

protection – but MiFID II regulations, are

extremely complex and will be extraordinarily

expensive to implement.

Who is impacted? Everyone, really – although

the directive is driven by European regulators,

elements of MiFID II apply to both a wide range of

EU and non-EU institutions, and touch just about

every facet of a financial institution’s business.

Indeed, even IROs, who are not directly involved

with MiFID II’s operational and compliance

requirements, will still benefit from having a good

understanding of the rules as they will

undoubtedly have a significant long-term impact

on investor behavior and will over time alter how

corporate access is organized and consumed.

Geographically, companies authorized in the

European Union to provide investment advice,

trading or portfolio management services will be

subject to the new rules but as would be expected,

in increasingly globalized capital markets, it is

impossible to contain regulations within geo-

graphic boundaries. So, even companies

domiciled outside the EU but which market

financial products into the region or transact

with firms or customers covered by MiFID II

are also subject to the rules.

There are some exceptions – insurance

companies, collective investment schemes and

pension plans, for instance, are exempt from

some MiFID II requirements. But generally

speaking, sell-side banks, broker-dealers, and

asset managers are all directly affected.

On the sell side, one of the largest departures

from the status quo is the new requirements on

the payment of investment research. Since time

eternal, asset managers have paid for sell side

research through trading commissions,

effectively bundling the payment of the two

services together. Investment research was

provided gratis in return for the asset manager

placing trades with the research provider under

the implicit understanding that the commission

essentially underwrote the cost of the research.

However, under MiFID II, that quid-pro-quo

arrangement goes away as the regulators

characterize investment research as an

impermissible non-monetary benefit.

Both buy and sell side firms will now have to

break out research costs as a separate line item.

Asset managers, will be required to budget, track

and report separately for trading and research

costs, as well as demonstrate knowledge about

the “value” of the research consumed. This

“unbundling” of commissions and research will

result in asset managers either having to absorb

the cost of the research themselves (impacting

profit margins) or by passing the cost onto fund

investors via higher management fees. This single

change will undoubtedly drive a behavioral

transformation in how asset managers consume

and evaluate research and is something we will

examine in more detail in subsequent papers in

this series.

For the sell side, the change is more complex. In

addition to separating research and commissions,

the sell side must also unbundle a menu of

related services – calls with analysts, corporate

access, conferences, etc. – and monitor who

receives what, for how much, and when. In other

words, the sell side now has responsibility for

adequately communicating the value of the

services provided, demonstrate that they weren’t

provided for free and also ensure that the client is

fully aware of the value of the benefits received.

Although the rule changes on the payment of

research and treatment of corporate access are

significant, the vast majority of MiFID II is

concerned with increasing transparency in trading

execution, with a heavy focus on the role of trade

reporting. On the buy-side, asset managers will

have to provide enhanced, order, trade and

transaction reporting on an expanded list of

assets with the reporting rules requiring more

than 60 different pieces of data per trade, up from

23. This combined with additional rules

surrounding the sale of financial products and

services, marketing practices and other investor

protections amount to a considerable reporting

burden. For obvious reasons, compliance with

such complicated, granular requirements is a

daunting and expensive task for even the largest

institutions.

As is clear, MiFID II has the potential to

revolutionize many of the practices that have been

standard within the financial industry for

generations and in our next installment we will

focus more specifically on what MiFID II means

for Corporate Access and how both buy and sell

side firms are adapting.

weconvene.comV I S I T

Broadly speaking, MiFID is a far-reaching series

of directives designed to increase transparency,

coordinate regulation, improve compliance and

boost supervision of financial institutions across

the EU. The goals are laudable – increased

market transparency and more investor

protection – but MiFID II regulations, are

extremely complex and will be extraordinarily

expensive to implement.

Who is impacted? Everyone, really – although

the directive is driven by European regulators,

elements of MiFID II apply to both a wide range of

EU and non-EU institutions, and touch just about

every facet of a financial institution’s business.

Indeed, even IROs, who are not directly involved

with MiFID II’s operational and compliance

requirements, will still benefit from having a good

understanding of the rules as they will

undoubtedly have a significant long-term impact

on investor behavior and will over time alter how

corporate access is organized and consumed.

Geographically, companies authorized in the

European Union to provide investment advice,

trading or portfolio management services will be

subject to the new rules but as would be expected,

in increasingly globalized capital markets, it is

impossible to contain regulations within geo-

graphic boundaries. So, even companies

domiciled outside the EU but which market

financial products into the region or transact

with firms or customers covered by MiFID II

are also subject to the rules.

There are some exceptions – insurance

companies, collective investment schemes and

pension plans, for instance, are exempt from

some MiFID II requirements. But generally

speaking, sell-side banks, broker-dealers, and

asset managers are all directly affected.

On the sell side, one of the largest departures

from the status quo is the new requirements on

the payment of investment research. Since time

eternal, asset managers have paid for sell side

research through trading commissions,

effectively bundling the payment of the two

services together. Investment research was

provided gratis in return for the asset manager

placing trades with the research provider under

the implicit understanding that the commission

essentially underwrote the cost of the research.

However, under MiFID II, that quid-pro-quo

arrangement goes away as the regulators

characterize investment research as an

impermissible non-monetary benefit.

Both buy and sell side firms will now have to

break out research costs as a separate line item.

Asset managers, will be required to budget, track

and report separately for trading and research

costs, as well as demonstrate knowledge about

the “value” of the research consumed. This

“unbundling” of commissions and research will

result in asset managers either having to absorb

the cost of the research themselves (impacting

profit margins) or by passing the cost onto fund

investors via higher management fees. This single

change will undoubtedly drive a behavioral

transformation in how asset managers consume

and evaluate research and is something we will

examine in more detail in subsequent papers in

this series.

For the sell side, the change is more complex. In

addition to separating research and commissions,

the sell side must also unbundle a menu of

related services – calls with analysts, corporate

access, conferences, etc. – and monitor who

receives what, for how much, and when. In other

words, the sell side now has responsibility for

adequately communicating the value of the

services provided, demonstrate that they weren’t

provided for free and also ensure that the client is

fully aware of the value of the benefits received.

Although the rule changes on the payment of

research and treatment of corporate access are

significant, the vast majority of MiFID II is

concerned with increasing transparency in trading

execution, with a heavy focus on the role of trade

reporting. On the buy-side, asset managers will

have to provide enhanced, order, trade and

transaction reporting on an expanded list of

assets with the reporting rules requiring more

than 60 different pieces of data per trade, up from

23. This combined with additional rules

surrounding the sale of financial products and

services, marketing practices and other investor

protections amount to a considerable reporting

burden. For obvious reasons, compliance with

such complicated, granular requirements is a

daunting and expensive task for even the largest

institutions.

As is clear, MiFID II has the potential to

revolutionize many of the practices that have been

standard within the financial industry for

generations and in our next installment we will

focus more specifically on what MiFID II means

for Corporate Access and how both buy and sell

side firms are adapting.

®

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PA R T N E R E D W I T H

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