The European Union (EU) is introducing its second Markets in Financial Instruments Directive (MiFID II) with effect from 3 January 2018. The directive is a response to the financial crisis of 2008, and promises to bring more transparency and consumer protection to European financial markets.
The first-order effects of MiFID II will be limited for South African financial institutions, especially those without exposure to European financial markets and customers. But those with clients and contracts in the EU, will face new reporting demands from counterparties in the European trading bloc.
In addition, it seems likely that G20 countries like South Africa will harmonise much of their financial regulation with MiFID II in the years to come. Rather than viewing this as a burden, there is an opportunity for financial institutions in South Africa to demonstrate their commitment to transparency and to get a competitive edge.
MIFID II will undoubtedly create disruption and force institutions to adapt, however it will not affect all firms equally on 01 January 2018.
As the onus will be on South African investment firms with EU counterparts receiving research to comply with the regulation, there are mixed views on the need for MIFID II readiness in SA. For some firms by simple virtue of their counterparts they need to adapt quickly, for others they see a window of time to change as the regulatory wheels turn in SA and still others who are more SA centric, feeling less urgency around change.
From a South African point of view, it can be expected that over time the research industry will evolve within the new framework possibly seeing funds only willing to pay for the most cutting- edge research that generates alpha. This could create an evolution on how people charge for their research. We have already seen interesting developments from some banks, including BBVA, NatWest and Credit Suisse who are preparing to provide fixed income research for free in preparation of MIFID II.
The legislation will surely have some of the intended effects but more interesting are the unintended ones that remain to be seen.
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