Fintech Insights

Turn MiFID II to Your Advantage

June 29, 2017

There are many regulations affecting the sell side, but I’d argue that MiFID II is the most significant for anyone in the trading business.

In case you’ve forgotten the details amid all of the other regulations that weigh on your mind, MiFID II/MiFIR expands MiFID I’s regulatory requirements for equities and extends into non-equity asset classes as well as bespoke OTC contracts.

Among other effects, this is likely to fundamentally reshape interactions between sales and customers; sales and trading; and trading and the market.

The good news is that these new requirements can be a catalyst for increasing efficiency and creating a more competitive service offering. The data compiled for compliance reasons can be leveraged to enhance client interactions. It will allow sales to access information in real time, understand clients, review profitability and check hit ratios. Data that previously was out of reach, buried deep in phone records or chat logs, will now be available.

The only way to stay competitive in this new environment is to replace today’s predominantly voice-driven workflows with electronic ones. This will allow you to trade more efficiently, and bring automation to trading and sales desks.

However, not everyone will fully commit to electronification. Some will continue with their manual processes and fulfil the regulations by simply adding additional layers of manual process on top. It’s likely that these institutions will have to reevaluate such a decision in 2018 already. The imposed transparency requirements will make it painfully clear for you (and your customer) if you are keeping up as that market evolves.

The combination of MiFID II and Basel II may also cause some market participants to withdraw from businesses that they find too small, too expensive or too difficult to comply with. This is typically due to capital requirements, or perhaps they do not want to take on the Systematic Internalization obligations. Or they may not have the means to fully digitize the internal and external exchange of information (e.g., orders, quotes, RFQs, RFS, indications, etc.) to stay competitive.

Those who are bold enough to move quickly, however, can turn these changes to their advantage. In fact, I believe that the first movers are likely to profit from the electronification of OTC trading, as slow movers (and those exiting business) will leave the field open. Increased efficiency also will translate to lower prices at some point, making those first movers even more attractive to customers.

Where will you be this time next year? Do you have the right strategy to turn MiFID II and the electronification of OTC trading into a competitive advantage?