The MiFID II Migraine

I haven’t yet fully digested the 196-page proposal for the second draft of Markets in Financial Instruments Directive (MiFID II) or the lighter 60-page proposal on the Markets in Financial Instruments Regulation (MiFIR) that was published by the European Commission on Oct. 20, but I’ve skimmed them. Based on what I have read, I would definitely be long in Bayer and other aspirin manufactures.

The industry is in for a multi-year migraine as it prepares for and ultimately complies with the new regulations. Unlike Mifid, which took effect in 2007, Mifir will share its love across every desk at an investment bank.

So, shooting from the hip, I'll rate a few of Mifid II’s major components, from zero aspirins for no pain, to 10 aspirins for "Please leave me in a quiet, dark room and make the world go away.”

Regulating algorithmic equities traders: 5 aspirins
Compared to other business lines in the bank, I feel that the equities desks are probably getting off the lightest under the new regulation. The European Commission would rather pursue high-frequency trading "in terms of robust risk management and operational safeguards.” To start, global banks can leverage their experience with the 15c3-5 pre-trade risk rule from the US Securities and Exchange Commission (SEC), which is set to go live next month.

These days, when I hear regulators discussing risk management, they seem to take a holistic view of a client's risk exposure across all asset classes, rather than simply by instrument type. Delivering this capability in real-time across the enterprise would definitely be worth another five aspirins.

Creating a consolidated trade data feed: 3 aspirins
From a technology perspective, all the components are there to create a consolidated post-trade feed. It's just an issue of having the exchanges and market data aggregators rowing in the same direction.

Establishing non-equities organized trading facilities (OTFs): 7 aspirins
Creating a matching platform for relatively illiquid markets is a technological no-brainer for banks that already operate dark liquidity pools and multilateral trading facilities (MTFs). Nevertheless, as Dodd–Frank has shown in the US, the major issue will be tweaking or replacing the various over-the-counter (OTC) trading and management systems that never had to do the same level of regulatory reporting as equities trading systems did.

Increasing investor protection for complex financial and structured instruments: 10 aspirins
Why is it that all the simple-sounding projects wind up causing firms to build new systems from scratch, essentially re-inventing the wheel? I have a feeling this proposal will make banks think back to the good old days when they were developing their best-execution policies and classifying their clients into the proper investor profile. I have no idea how firms will determine how new and bespoke products are appropriate for their various institutional clients. I cannot envision the regulators tackling this in a prescriptive fashion, which means firms might be left to creating their own internal processes that will need to hold up to regulatory scrutiny. 

Don’t get me wrong; I appreciate the Commission's goal of ensuring a level playing field, transparent market and improving investor safeguards. They are noble, but they ensure a larger percentage of IT budgets will go toward meeting regulations rather than innovating in the markets.