Smooth first day as markets adapt to MiFiD II
The biggest regulatory change in Europe in 10 years got off to a comparatively smooth start yesterday as the chairman of the European Securities and Markets Authority said he had seen no teething problems.
"What we can see, for our part, is no glitches so far," Steven Maijoor said in a conference call with reporters.
The rules mean that "for the first time we see data of all financial instruments in the European Union."
After seven years of preparation, $2bn (€1.66bn) in compliance costs and one false start, the finance industry was bracing for one of the most seismic regulatory shifts in history, affecting everything from research to dark pools as the Markets in Financial Instruments Directive (MiFiD II) came into effect.
Regulators eased the burden on companies ahead of the start period, giving grace periods on some of the biggest issues as banks and asset managers struggled to comply in time.
Investors have been sitting on their hands, with trading volumes below average, although the first week of the year tends to be quiet anyhow.
Client business at one major brokerage in Europe was almost non-existent as the rules were poised to take effect, a person with knowledge of the matter said.
TP ICAP, the world's largest interdealer broker, expected trading volume in bonds, swaps and other securities typically traded off-exchange to be lower than usual across the board and across most markets this month, according to a representative at the firm.
"Reality is, it's going to need a lot of refining as we see the market and clients take on the rules," said Neil McLean, head of execution trading for Asia ex-Japan at Nomura's Instinet Pacific Services in Hong Kong.
"We have some challenges with categorising clients and making sure they receive only what the rules allow."
His firm expects less business in the short term from Europe as clients get used to the rules, Mr McLean said, adding that trading in Asia was quiet yesterday, with Japan shut for the New Year holiday.
The rules present banks with opportunities to grow businesses offering passive investing, research and systematic internalisers but also leave them facing competition from research boutiques and platforms that offer low-cost trade execution.
Retail lenders may also suffer from the ban on some inducements for investment advice and portfolio management.
The legislation may also dissuade companies from listing on stock exchanges, especially smaller businesses.
Giles Edwards, an S&P global ratings analyst, wrote: "Over the longer term, there will likely be more losers than winners."
"If a corporate broker would only market a firm to investors who pay for research, getting new money in the door will be far more challenging," said Nick Burchett at Cavendish Asset Management. (Bloomberg)