In a new report entitled 'Navigating MiFID II - Strategic Decisions for Investment Managers', Deloitte has highlighted the key challenges of the second version of the MiFID directive, which will provide for the addition of organised trading facilities (OTFs), new safeguards for algorithmic and high-frequency trading activity, reinforced market supervision an stricter portfolio and investment management requirements.
In the report, Deloitte outlined the changes that the Directive is likely to bring, indicating areas where investment managers could potentially gain competitive advantage as MiFID II will increase the costs of doing business and reduce margins but will not affect all market players equally.
"The increased costs are unlikely to be passed on to investors due to competition between firms," explained Simon Ramos, Partner and Advisory & Consulting Investment Manager Leader at Deloitte Luxembourg. "Larger investment managers will be better placed to absorb these costs and smaller niche firms may be less affected by certain rules. Firms finding themselves in the middle-group need to consider how to best prepare for MiFID II, and possible options are market consolidation, changing product offering and investment strategy."
The report stated that the Markets in Financial Instruments Directive (MiFID) II wiill have significant and far-reaching implications for the operations, conduct and governance of multiple organisations in the Grand Duchy and wider Europe. The Directive is considered as the European regulation which holds the potential for the greatest impact on investment managers and their strategy in the two years to come, and the timeline for implementation ends in January 2017. According to Deloitte Luxembourg, market players are using the year's period before its implementation to unearth ways in which to optimise their business under the new rules and turn MiFID II into an advantage for their business.
Increase transaction reporting requirements under the new Directive are set to have considerable technological implications for small investment managers, with the report suggesting that third party reporting solutions will emerge to respond to such needs. MiFID II is likely to lead to substantial changes in investment managers' product offerings and a shift to more 'non-complex' products.
Investment managers are expected to opt for multiple distribution channels and centre their focus on direct to client offering and invesment in digital services. The report, although an underlining of the challenges MiFID II will bring with it, also details possible opportunities for growth in the midst of this new Directive.
"MiFID II will give rise to a significant amount of new data," stated Johnny Yip, Partner and Investment Management Leader at Deloitte Luxembourg. "Market-leading firms will seek to use the increased data to their competitive advantage and use MiFID II as a catlyst to ensure their data infrastructure is flexible and efficient. Investmetn managers should be thinking strategically about how they can optimise their business under the new rules".
MiFID II was adopted by the European Union in April of last year as reform proposed by the European Commission in 2010, intended to address the shortcomings of the initial MiFID of 2007. The new Directive will aim to further reduce the systemic risk which arose during the financial crisis by transforming trading and transparency, with the greatest effects on derivatives and fixed income assets.
Photo by Deloitte (L-R: Simon Ramos; Johnny Yip)
