LONDON (Reuters Breakingviews) - Europe’s market big bang offers clear pain for a fuzzy gain. The overhaul of financial rules bundled in the European Union’s MiFID II directive is designed to make finance fairer and safer. But that laudable aim comes at a heavy cost, with an unrealistic deadline, and may open up new regulatory loopholes.
The latest iteration of the Markets in Financial Instruments Directive, which comes into force on Wednesday, touches most aspects of European financial markets. Banks will have to make sure customers are sold the right products and charge them directly for services like research that were previously bundled into trading costs. Fund managers will have to make sure they get the best prices, and more trading will happen on transparent platforms.
The result should be more competition and better prices – ultimately leading to cheaper capital for companies. Such desirable aims come with a hefty up-front bill, though. Opimas, a consultancy, reckons banks, brokers and asset managers will spend 2.5 billion euros getting ready for MiFID II, and over 700 million euros a year after that coping with new rules. Most of that burden will fall on banks.
There are indirect costs, too. Forcing banks and brokers to charge customers directly for research is likely to shrink the amount of financial analysis conducted by banks. That may impair price discovery, particularly for smaller companies, pushing up their cost of capital. Moreover, the burden of regulation will benefit firms with superior technology and bigger businesses. That may encourage consolidation and restrict choice.
The rules may also create new loopholes in financial markets. Take the clumsily-named “systematic internalisers”, a kind of trading system where banks match orders from clients directly with positions on their books, rather than executing trades through an exchange. These may now have a competitive edge over more heavily regulated exchanges. That could fragment markets and undermine MiFID II’s stated aim of improving transparency.
Lastly, the new rules may encourage more trading to shift outside the EU. Take “dark pools” - trading venues with fewer disclosure requirements than exchanges. By limiting their use, MiFID II may simply push those trades to take place elsewhere.
A more immediate question is when the rules will actually come into force. German and British regulators have already given clearing houses a last-minute reprieve from rules giving customers more choice over where to clear trades. If that encourages other delays to the rules, or sloppy implementation, the big bang may still be some way off.
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