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The Impact of MiFID II on Asset Managers

It is safe to make this prediction about the changes that will take place in the international asset management as a result of the introduction of the European Union-driven regulation known as Markets in Financial Instruments Directive II (MiFID II).

The starting point for MiFID II was logical and its objectives are praiseworthy. But the sheer scope is vast. And its complexity was shown by the decision by regulators to exempt ICE Futures Europe, the London Metal Exchange and Eurex from trading and clearing compliance for a further 30 months.

Euronext’s three derivatives exchanges have also been granted a deferral from national regulators to comply with open access under MiFID II, the latest exchange group to win relief from the regime. The rules will not apply to the trading venues in Paris, Brussels and Lisbon until 3 July 2020.

Once the details of MiFID II have bedded in and the inevitable unintended consequences have been identified and addressed, we will be in a better position to judge how it has improved the operation of the EU's financial markets and the extent to which it benefits clients.

There will be changes, in the short, medium and long term. Of that there is no doubt.

There will be changes, in the short, medium and long term. Of that there is no doubt. But anyone thinking that there would be some kind of spectator-friendly Big Bang event in the immediate wake of the delayed implementation of MiFID II on January 3 will be disappointed. The earth did not move.

This latest accommodation follows the year-long reprieve granted by ESMA from the original target date of January 3, 2017. It is interesting to note, though, that 11 EU member states have transposed the EU legislation into their own national laws. The others are expected to follow in the coming months.

MiFID II, widely seen as a key text in the developing regulatory framework, will in due course deliver the new industry landscape that regulators have been striving to achieve since the global financial crisis began to erupt a decade ago.

Investors will benefit

Changes will affect both the buy-side (investors) and the supply-side (asset managers and their service providers).

On the buy-side, investors can expect to benefit in a number of ways. As the new transparency imposed by MiFID II grows, end-investors in turn will focus more on the costs associated with investment as well the returns they might expect.

They will benefit significantly from improvements in reporting, transparency in pricing and execution of trades, from the increasing independence of important financial research and from the centralisation of operations on market infrastructures.

They will also benefit from the application of rules on pre-trade transparency for equities and share-based instruments to bonds, derivatives and structured products, and rules requiring that they be sold only investments that are appropriate to their needs and financial sophistication.

Fees will come under pressure

As MiFID II brings transparency on costs and charges, this in itself will bring competitiveness in the marketplace. On the sell-side, the erosion of mid-tier asset managers will continue. Fees will come under growing pressure. The impact will be felt slowly, but it will be felt. Those who cannot meet the new demands will find themselves leaving the stage.

The asset manager behemoths will continue to grow, gathering ever larger volumes of assets as investors and their advisers take a flight to quality and strength, or at least perceived quality and strength.

All parties to these deals openly stated that a key driving force was to meet regulatory requirements and reduce the cost of doing business.

Blackrock alone has seen AuM (assets under management) growth of over 400% in ten years (2007 – 2017). Some of this has admittedly come via acquisition but the majority has come from genuinely new inward flows.

Specialists will also continue to prosper – the ability to provide returns as described will attract the ability to command higher fees. BlueBay, for example, from being a start-up in 2001, now has AuM of $57.2bn.

The eventual cost of full compliance will drive more of the large-scale mergers and acquisitions activity that have in the recent past created the likes of Janus Henderson and Aberdeen Standard Life. All parties to these deals openly stated that a key driving force was to meet regulatory requirements and reduce the cost of doing business.

ETF sector will continue to expand

The exchange-traded funds sector will continue its apparently unstoppable expansion. The delivery of reliable data on ETF pricing and structure will encourage greater ETF use in Europe, which is currently significantly lower than in the USA.

ETFGI, an independent research and consultancy firm on trends in the global ETF/ETP ecosystem, reported in January that assets invested in ETFs and ETPs listed in Europe increased by 40.1% during 2017 to reach a new high of US$802.38bn at the end of December

According to ETFGI’s December 2017 European ETF and ETP industry insights report, an annual paid-for research subscription service, assets invested in European-listed ETFs/ETPs grew by a record $229.76bn during 2017, over double the previous record of $67bn set in 2016.

The increase of 40.1%, from $572.62bn at the end of 2016, also represents the greatest growth in assets since 2009 when markets recovered following the 2008 financial crisis.

During 2017 ETFs/ETPs listed in Europe saw record net inflows of $108.28bn; 94.4% more than net inflows for 2016, and over double the average for net inflows over the previous five years. December 2017 also marked the 38th consecutive month of net inflows into European-listed ETFs/ETPs, with $1.63bn gathered during the month, adds ETFGI.

And in the end

In the end, then, in accordance with classic Darwinian theory, we will witness the survival of the fittest. Change will be gradual, but investors can be assured that it will happen, and that it will be to their benefit.

The evolution will not be televised, but it will nevertheless be a gripping, long-running story.

Impacts of MiFID II

Short-term
there will be more mergers and acquisitions
Medium term
transparency on fees will drive changes in end investor/financial adviser behaviou
Long-term
the number of smaller asset managers will fall simply because of the cost of doing business