The financial services industry is counting down towards the implementation of MiFID II this coming January. The long-hyped implementation promises to dramatically reshape the industry, ushering in new transparency and reporting regimes as well as new regulations. However, new disclosure requirements could be the most significant of all, resulting in the scaling back of research costs and an upheaval of data management infrastructures.
While the new legislation on January 3, 2018 will foster improved transparency, reporting standards, and other obligations, one consequence could be the curtailing of research spending by banks. Up until now, banks and asset managers were not obligated to publicize research costs – rather, these services were integrated into trading costs in many instances, in essence not costing anything.
Expanding on this trend, all data will face more broadly based transparency requirements moving forward, clearly dictating changes on existing operations. As such, this is problematic for a variety of channels, including buy- and sell-side firms and asset managers.
Of note, current transaction reporting is mandatory for all financial instruments on a T+1 basis, however under the earlier MiFID I regime, this was confined to twenty fields, while MiFID II increases this to sixty-five. Consequently this will require investment managers to process much more data from venues to provide disclosures to their clients and to their national respective regulators.
On the whole, data management is utilized by multiple avenues of the financial services industry, as well as business management and technological components. MIFID II’s new transparency measures will place a particular stress in this area, emphasizing such operations as trade orders and execution management utilities. More specifically, data sourcing, management, and distribution loom as the most pressing, citing a recent A-team report.
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Perhaps paradoxically, these measures are seen as a positive force in the sense that previous entities in the market operating without transparency requirements will now face these obligations. However, these rapid changes may not yield their intended effect as many new areas such as non-equity instruments, including fixed income, swaps and derivatives will now come under regulatory coverage.
This represents a shakeup of the status quo as well, given that buy-side firms could simply rely on their sell-side counterparties to report trades to regulators. Under MiFID II however, this practice will be curtailed, as transaction reporting will be expanded en masse to include much more rigorous detail on the part of brokers and investment managers.
Death of the analyst?
To this end, an unintended consequence for investment managers may be the stifling of research and analysts. Since MiFID II will require the publicizing of research costs to investors, this could place a stress on existing operations looking to cut costs rather than disclose weighty sums.
This rings true in the banking sector, which is already in the midst of a multi-year restructuring process. Previously adopted ‘lean and mean’ strategies by lenders portend sizable contractions in the research sector. According to a McKinsey & Co. study, new regulations in Europe stifling free research will lead to the axing of hundreds of analyst jobs as banks plan to trim upwards of $1.2 billion in research spending.
The report put out by the consultancy could be a devastating blow to the research sector, which thus far has managed to escape the fate of other banking jobs, i.e. back-office and IT positions. Consequently, the report estimates that the collective $4.0 billion that is spent from the top 10 sell-side banks annually will be trimmed by upwards of 30 percent as clients exercise greater restraint on what they pay for.
Increased data complexity looms as stifling force
In terms of data management, many firms will also need to recalibrate these operations to better assimilate series or tick databases. Subsequently, there will be many new challenges adopted via the implementation of MiFID II, including the proper recording of trades, monitoring, and the deployment of reliable data systems.
An increased complexity could prove problematic given the specter of bottlenecking constraints, echoed recently by Dermot Harris, Senior Vice President, Regulatory Solutions, OneMarket Data. “While people tend to get excited about sharp increases in volume, in MiFID II’s case, experts are worried about the complexity and diversity of data because ‘reference data is a quiet troublemaker.'”