Everything you need to know about sweeping finance reforms
European finance has been abuzz over an obscure acronym - MiFID II - set to radically change how assets from stocks to commodities are traded and investors' money is managed.
EU firms have spent more than €1.6bn preparing for it. Regulators say it will protect investors, boost transparency and rebuild trust tarnished by the crash. The industry has spent months finding ways to sidestep parts of it.
MiFID II is a law entering into force today. It has taken seven years to get the second iteration of the Markets in Financial Instruments Directive (MifiD) into shape. It alters how investment research is paid for, how trades are documented and executed, and how brokers share information, find the best prices and pay one another.
"It's all about casting light in areas of the market that were previously dark, transparency and ultimately treating the investor at all times in a fair manner," said Ronan Brennan, Dublin-based chief product officer at Compliance Solutions Strategies, which helps firms meet MiFID demands.
Here's a look at what MiFID II means for European finance.
Fund managers now have to pay for the research they use. They can no longer call up their favourite analyst for free for the lowdown on what stocks are hot or how the latest twist in Brexit negotiations will affect their portfolios.
MiFID II forces investment banks to charge separately for research and brokerage services to avoid conflicts of interest. Up to now, the cost of research was built into the fees charged by the likes of Goldman Sachs or Morgan Stanley. That worried regulators as it paved the way for commissions to go to banks that offered the best tips and access, not the best prices.
As fund managers get more choosy, it's widely expected prices being quoted for access to research will drop in 2018, and some analysts could lose their jobs.
2 Making stock markets more transparent
MiFID II clamps down on so-called dark pools, private markets that allow investors to buy and sell large blocks of shares without revealing beforehand the size of the orders or the price they paid.
Even regulators acknowledge they serve an important market function but exchanges have complained for years that too much trading takes place on dark pools, depriving investors of the best prices and them of juicy trading fees. Under MiFID II only 8pc of volume in any stock can change hands this way.
3 Will the industry keep trading in the dark?
The short answer: yes, but less so. "We are likely to see a distinct drop in dark trading once the caps are in force," said Anish Puaar, European market structure analyst at Rosenblatt Securities.
4 How does it lead to greater surveillance?
Regulators want to be able to spot risks early and quickly reconstruct events when something suspicious happens, so MiFID II will force the investment community to keep tabs of almost everything, including traders handing over personal ID such as passport numbers to every venue they trade on, time-stamping trades and reporting bond transactions within 15 minutes of them taking place.
Brokers and investment managers will have to record all conversations related to a deal and store them for at least five years.
5 What's in store for January 3 and 2018?
Implementing MiFID II is expected to put a big strain on the technology used to support financial markets, trading volumes are projected to drop across Europe this month as the industry adjusts to the new MiFID world. (Bloomberg)