After seven years of preparation, $2 billion in compliance costs and one false start, the biggest shake-up to European regulation in a decade is finally here. With so much at stake, investors are likely to sit on their hands for now.

Trading volumes slumped ahead of the changes, according to two brokers with knowledge of the matter, with client business at one major brokerage in Europe almost non-existent as the rules were poised to take effect Wednesday.

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The finance industry is bracing for one of the most seismic regulatory shifts in history, affecting everything from research to dark pools. There’s no official time for flicking the switch to the new rules, and brokerages were still meeting late Tuesday to discuss how to trade under MiFID II as companies race to comply with the law that provides as many opportunities as problems for banks and asset managers.

TP ICAP Plc, the world’s largest interdealer broker, expects trading volume in bonds, swaps and other securities typically traded off-exchange to be lower than usual across the board on Wednesday and across most markets this month, according to a representative at the firm. Another brokerage told clients that it wouldn’t accept swap trade orders from the last trading week in December through Jan. 3, said one of the people, who asked not to be named because the information isn’t public.

Inducement Ban

The rules present banks with opportunities to grow businesses offering passive investing, research and systematic internalizers but also leave them facing competition from research boutiques and platforms that offer low-cost trade execution.

Retail lenders may also suffer from the ban on some inducements for investment advice and portfolio management. That’s because banks that distribute mutual funds to their retail clients often receive and retain a portion of the initial sales charge from the fund manager, or receive an annual fee, S&P Global Ratings analyst Giles Edwards wrote in a note Tuesday.

“Over the longer term, the disruptive nature of this major regulatory change will become more apparent, and the winners and losers will likely emerge more clearly,” Edwards wrote. “There will likely be more losers than winners.”

IPO Issue

The legislation may also dissuade companies from becoming publicly traded, as the unbundling of research and execution is widely expected to lead to less coverage of smaller firms by analysts.

“If a corporate broker would only market a firm to investors who pay for research, getting new money in the door will be far more challenging,” said Nick Burchett, U.K. equities manager at Cavendish Asset Management. “Limited access to capital is going to be a huge hurdle for companies coming to market if they now find they have only a very concentrated shareholder base. It may also be tougher to secure those cornerstone investors who are prepared to support a company for the long-term.”

The regulator is unbundling research in an attempt to get a better deal for asset owners. That means asset managers must stop receiving analysis they haven’t purchased. One investment bank, in an attempt to stem the hundreds of research emails that have traditionally been received, is sending automated emails asking not to be sent analysis and seeking written confirmation that the sender will comply.

“There’s going to be a lot of fund managers who have to walk over to the compliance person and say, ‘look I’ve been sent this, or opened this envelope, what do I do?’” said Alistair Haig, who teaches financial markets at the University of Edinburgh Business School.

Plunging Prices

The unbundling has sent pricing for analysis plunging. Sydney-based money manager AMP Capital, which oversees about $140 billion, expects its payments for analysis to fall by 30 percent to 50 percent from last year for a like-for-like service.

Some providers appear to be willing to take any price to be kept on a money manager’s books, according to the chief operating officer of an equity hedge fund that manages more than $1 billion. An executive at another stock-focused hedge fund overseeing about $300 million said it’s paying on average $21,000 annually to each of its research providers. Corporate access is included in the price, the person said. They asked not to be identified as the details are private.

Those low prices could have implications later. Russell Napier, co-founder of research marketplace ERIC, said the U.K. regulator should intervene if a price war for analysis begins.

Still Waiting

Despite the long buildup, at least nine of the 28 European Union members have yet to convert the rules into national legislation or regulations. Valdis Dombrovskis, the EU commissioner in charge of financial-services policy, has said markets could face disruption caused by the late transposition.

Others disagree, with Michael McKee, head of financial services regulation at law firm DLA Piper, arguing it will be “more of a whimper than a bang.”

“While it is one of the most important pieces of EU legislation for securities markets in years,” he said, the fact some countries haven’t passed the laws mean “consequently it will still be some time before these major market changes hit home.”

Source:
courtesy of BLOOMBERG

by William Canny , Will Hadfield , and Lukanyo Mnyanda

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