The financial industry will need to spend more than €2.5bn ($3bn) to comply with the MiFID II regulations, which come into force in the European Union in a year.
Anna Griem, a capital markets analyst at management consultancy Opimas, said in a report that 83% of this spend will come from banks and just 14% from asset managers.
“Although banks as a group will spend more, asset managers will be uniquely affected because they are mostly implementing this infrastructure for the first time.” added Griem.
She said that individually, the twenty tier one banks will spend nearly six times as much as their 200 tier two and three counterparts. However, in total, tier two and three banks will spend nearly twice as much as tier one banks.
Griem said: “Spending by the market to maintain MiFID II compliance will total €720m annually for five years before decreasing slightly. Banks will be responsible for 74% of this repeated spend.”
Last month the FCA, the UK regulator, published its final consultation on MiFID II. Law firm Ashurst said in a briefing note today: “Many of the proposals are simply to bring the FCA handbook in line with other MiFID II changes for some of the specialist regimes but there are a couple of points that are worth noting by the wider audience.”
Ashurst highlighted the guidance on transaction reporting and said the regulator had made clear that it believes trading venues can use an Approved Reporting Mechanism, the MiFID II equivalent of trade repositories, to make transaction reports to the FCA. In addition, the FCA has confirmed that it is permissible for a group to aggregate its reporting via an internal hub provided the hub uses an ARM or is an ARM.
“This could have gone further and more explicitly referred to delegated third-party transaction reporting (where the third-party processes such reports and routes them to an ARM); a missed opportunity but enough for most to become more comfortable that such a structure is possible,” added Ashurst. “The FCA could have also taken the opportunity to clarify that this logic also applies to post-trade reporting, but did not.”
Griem said that exchanges and trading venues who already trade report, will spend significantly less in preparation for MiFID II. She added: “As a group, they will spend about €88m before January 2018, and €26m on annual maintenance. Solutions targeting exchanges and multilateral trading facilities will naturally face a smaller market.”
The new regulations also place restrictions on trading in dark pools. As a result Griem expect a merging of algorithmic orders to increase order sizes.
“Several stock exchanges including London Stock Exchange, Bats Europe, and Deutsche Börse have already introduced ways to trade large orders that take advantage of this waiver,” she added. “ We will also likely see volumes moving from dark pools to lit exchanges.”
MiFID II also introduces new requirements for best execution as firms have to provide evidence that they tried to meet their own best execution standards. Firms have to report their top five execution venues, execution quality, relationships with execution brokers, breakdown of order types, and execution venue fee arrangements.
“Saxo Bank, for instance has switched from a quote-driven to an order-driven execution model, giving their clients more direct control and trading oversight. In this model, clients can set preferences and priorities, including desired price levels or fill ratios.” added Griem. “Algert Global, an asset management firm, has also taken a deliberate step in differentiating its best execution policy by marketing its efforts in prioritizing the identification and correction of information leakage sites and quantifying trading impact.”
Ashurst said member states have until 3 July 2017 to bring their domestic laws into line with the MiFID II requirements, six months before regulations apply on 3 January 2018 and the FCA aims to finalize changes to its handbook in the first half of this year.
