MiFID II Reaches Across the Pond: Is This the Calm Before the Storm?

Despite the view that MiFID II is a European regulation, US investment managers are experiencing disruption as they align their research payment and execution practices with the influential standard.

While MiFID II went into force on Jan. 3, 2018, US money managers of all types and sizes anticipate that MiFID II will influence their businesses, not just this year, but over the next year or two, according to a recent Tabb Group webinar.

Already larger firms have been unbundling research and execution fees, quantifying the value of research, and shifting equity trades from more expensive sales desks to algorithmic trading. And, many are focusing on transaction cost analysis (TCA), broker algo reviews and venue routing analysis to justify their broker selection and venue choices.

These trends emerged in the latest equity trading report by Tabb Group where 87% percent of buy-side firms surveyed expect to be impacted by the MiFID II regulation either directly or indirectly — a significant increase above the 76% who felt this way in 2017 and 68% in 2016.

“It’s become increasingly apparent that the rules are going to affect the US money management industry, even those that don’t have any European exposure,” said Dayle Scher, senior analyst at Tabb Group who discussed the 14th annual benchmark report “US Institutional Equity Trading 2018: Adapting to a New Reality” on a recent webinar.

This means not just global asset managers, but even mid-sized asset managers and smaller US-focused hedge funds say that MiFID II is looming over them and could indeed come to US capital markets.

“Certainly, medium and small investment managers are going to feel the most pain,” said Scher. “They don’t have the scale, they don’t have the budget to pay for research out of their bottom line, and they don’t have the internal analysts that the larger firms have.” Even so, investors have to show that they are aligned with the spirit of MiFID and that they’ve unbundled their research and execution fees, said the analyst.

But it’s not surprising that US money managers are conforming to MiFID II. “The dynamic here is that even if you are not directly impacted by European regulation because you don’t take European money and because you don’t manage European assets, you are competing with firms that are impacted by the regulation,” observed Alistair Cree, Product Manager, TCA, Analytics, and Algo Wheel at FlexTrade.

“MiFID II’s emphasis on best execution, transparency, and trade reporting is actually fairly attractive to plan sponsors and potential clients of asset managers and hedge funds,” said Cree.  From a competitive stance, firms need to have a formal best execution process and an RFP [request for proposal] process. Even though they are not legally obligated to comply with MiFID II, there are competitive pressures driving the asset management industry, he said.