Basics of MiFID 2

MiFID 2 is the revised “Markets in Financial Instruments Directive”, a broad set of European financial regulations that came into effect at the start of January 2018.

The original MiFID came into force in November 2007, just before the financial crisis. Its main intentions were to foster greater integration within Europe’s financial markets and to drive down trading costs, primarily for equites. The regulations also resulted in the creation of so-called multilateral trading facilities (such as Chi-X or Turquoise), which allowed equities of listed companies to be traded for the first time on platforms independent of large national exchanges, thus introducing competition and lowering the cost of trading.

Three years after the launch of MiFID, the European Commission (the executive arm of the European Union) began work on MiFID 2. The EC was keen to develop the existing legislation to build in lessons learnt from the financial crisis and to broaden its scope to encompass other asset classes. Simply put, the goal of MiFID 2 was to provide greater protection for investors and increase transparency throughout the capital markets.

Though the regulations do not specifically address listed companies (either inside or outside the EU), they dramatically impact the prevailing investment research and corporate access models offered by investment banks to institutional investors, which has significant knock-on effects for companies globally.

Perhaps the most relevant issue for IR teams that MiFID 2 seeks to address is how asset managers pay for research on companies and meetings with management, which they use to help them make investment decisions. Until now, asset managers received research, including written reports and phone calls with analysts, for ‘free’, i.e. the cost of this service was built into trading fees, which were often paid for by the fund managers’ clients. Conferences, roadshows and investment trips worked in a similar way. For the first time, fund managers are having to budget separately for research, corporate access and trading execution (something known as ‘unbundling’).

Faced with having to pay for these services themselves for the first time, investors are already becoming more selective in terms of what they consume. While it is still too early to understand the full impact of the new regulations, early indications point to an overall reduction in traditional research coverage and an increasing reliance on buy-side analysts over sell-side analysts. On the corporate access side, a decrease in investor attendance at broker-organised conferences and company roadshows seems inevitable, as investors look for more cost-efficient ways to study companies.

MiFID 2

Main goals:

• To make European markets more transparent and efficient;
• To restore confidence in the capital markets following the financial crisis;
• To move over-the-counter trading of various asset classes to established trading venues.

Coverage:

• All 28 European Union countries;
• A vast array of asset classes: equities, fixed income, commodities, currencies, futures, ETFs, retail products such as CFDs.

Who does it effect:

Almost everyone:

• Companies in EU countries;
• Companies in non-EU countries that operate in, or have investors in, the EU;
• EU fund managers;
• EU pension funds;
• EU retail investors;
• Indirectly (and to a lesser extent) fund managers in the US and Asia.

What does it mean in practice:

• Unbundling of payments for research/corporate access from trading execution;
• Introduction of volume caps for dark pools of equity;
• Greater pricing transparency for OTC and off-exchange markets;
• Tougher standards for financial and investment products.