This article was written by Annie Massa for Bloomberg News. It appeared first on the Bloomberg Terminal.
For thousands of brokers, traders and money managers based in the U.S., time is running out.
A shock wave is about to emanate from Brussels, the capital of the 28-nation European Union. That may as well be the dark side of the moon for some toiling away at financial firms in the U.S. A sweeping set of financial regulations dubbed MiFID II will take hold on Jan. 3, affecting everything from investment research to the booking of transactions. Most have heard of it, but they haven’t all fully addressed what will likely become a seismic industry shift.
“There will be a bit of a mad dash,” says Mike Stepanovich, who has spent months helping firms fine-tune their technology to value the research they consume and be MiFID compliant. Stepanovich, president of enterprise services at Visible Alpha, said it’s an arduous process and many firms won’t be ready.
While the Markets in Financial Instruments Directive won’t be rule of law in the U.S., it is almost certain to transform the way the trading business runs in both regions, industry participants say. While U.S. regulators have taken steps to mitigate some of the impact, MiFID’s reach will still be felt because it’s easier to meet the highest global regulatory standards than to juggle differing regional benchmarks. Key pillars of the rule include stopping banks from using free research as a lure for trading commissions, and requiring financial firms to prove they’re getting the best deal for customers.
EU regulators have yet to make key decisions surrounding dark pools, rules clashes with foreign markets and even collecting client data. For example, analysts say U.S. investors will be blindsided when learning MiFID rules require them to provide passport numbers when trading European securities. That part of the law is even seldom-discussed among EU clients.
“There are still a number of unknowns,” said Joanna Fields, CEO and founder of Aplomb Strategies Inc., which advises financial firms on market structure and regulatory changes. “Firms will have some potentially tough decisions to make before January.”
MiFID’s size and complexity have driven U.K. regulators to say they won’t be too hard on firms not complying. The Securities and Exchange Commission also kicked the can down the road, saying last week it would give a 30-month reprieve to firms stuck between MiFID and U.S. rules on research fees. Days before the SEC announcement, Allianz Global Investors CEO & CIO Andreas Utermann criticized what he called a surprising lack of guidance from American and Asian regulators this late in the game.
Bank of America Corp. decided not to take chances, hedging its bets by applying to register as an investment adviser to sidestep the conflicting regional rules.
Others are also preparing, particularly big banks and brokers with both U.S. and European operations. Some firms, like Franklin Templeton Investments, are promising to absorb external research costs for clients; trading companies like Virtu Financial Inc. and Tower Research Capital LLC have registered as MiFID-compliant venues called systematic internalizers; Instinet bought a trading platform that helps with MiFID’s limits on dark pools.
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“I don’t think there’s the level of understanding people would like to have,”Paul Hamill, global head of fixed income, currencies and commodities at Citadel Securities, said in a Bloomberg Television interview this week. “That stems from the challenge we face that some rules are still not clear.”
In the meantime, U.S. investor groups and state pension systems are learning to love MiFID, arguing that Europe’s rules would likely trim costs and pierce the opacity of Wall Street billing practices if applied in the U.S.
But it has taken time for many other U.S. firms to wake up, particularly small ones that only operate domestically. A survey by research firm Tabb Group found that almost a quarter of U.S. money managers said they don’t expect to be impacted by MiFID II. Tabb also found that even some of the savviestinvestors have holes in their preparation — analysts said they found so many gaps in asset managers’ plans that they concluded the majority won’t be fully prepared by MiFID’s Jan. 3 start date.
“If I’m a U.S. asset manager it’s very easy to see why I might think a European regulation wouldn’t have any impact on me,” said Rebecca Healey, head of market structure and strategy at Liquidnet Inc., a dark pool operator, in an interview earlier this year. “Let’s face it, no human being embraces change in perhaps the way they should.”