MiFID II: Its impact will be global
4 October 2017
By Adam Frederick
In today’s global market, regulations know no geographic boundaries. This will become obvious — perhaps painfully so — on January 3, 2018 when the Markets in Financial Instruments Directive (MiFID) II comes into play. While this regulation will drastically change the way European markets operate, its impact will be felt on a global scale.
Preparing for MiFID II is a difficult process for many, given that the directive brings some of the most wide-reaching changes to financial market regulation that the industry has ever seen. And while the arrival of MiFID II is imminent, it’s surprising the number of North American companies that remain uncertain over how to best prepare for the impacts of this new regulation.
Think only European-based corporations need to prepare for MiFID II? Think again.
A world with less research coverage
Under MiFID II, asset managers in Europe will have to pay a fee for sell-side research, rather than continue to use ‘soft dollars’ that come from commissions. Or, to look at it another way, sell-side analysts will now charge a fee for its research that European institutions will have to pay. If this fee becomes a revenue generator in Europe for sell-side firms, how long before banks and research firms begin to charge for all global research?
In Europe the expectation is that the fee-based research will cause institutional investors to utilize sell-side research far less than they do today — and source it from a much smaller universe of third-party banks and research firms or produce it themselves. For European corporates and IROs that means fewer analysts to cover their stock and more institutions to answer to directly.
So if the fee based research model catches on globally, all non-European IROs will also need to prepare for the realities of a world with lower levels of research coverage.
A World Without “Free Targeting”?
Corporate issuers will most likely find themselves with fewer sell-side analysts covering them in a post-MiFID II environment. This shines the light on a potentially larger problem for IROs and their senior management teams — how to get in front of the right investors at the right time. In a post-MiFID II world, IROs are going to find fewer and smaller corporate access desks to support their coverage universe, let alone those non-covered companies looking for “free targeting.” Therefore, IROs and their senior management teams will now be required to incorporate new strategies and solutions to engage investors and drive value creation.
One unique benefit to issuers that may actually end up coming out of MiFID II is that new solutions will emerge from non-traditional sources to better enable the connections between qualified, vetted investors and the companies they are actually looking to invest in.
MiFID II: A World of Change
MiFID II arrives in January 2018 and will leave an indelible mark on how sell-side research and corporate access is conducted — and for whom — worldwide. With the EU as the second largest market in the world, this kind of sweeping legislation will most certainly bleed into other regions, including North America. Make no mistake — change is coming, and it’s probably coming sooner than most of us think. In Europe, most companies already have a fully-implemented post-MiFID II solution in place. Here in North America the regulation has garnered a few headlines but does not seem to have the full attention of IROs in this region. And this could prove to be a costly mistake on their part. MiFID II is a game changer — for everyone. IROs in North America need to be as cognizant and prepared in addressing the new market realities of MiFID II as their brethren in Europe.
The good news is there are solutions out there and time is still on your side, for now. Forward-thinking IROs will be actively preparing for this change so that they are best positioned to address the void MiFID II will create in the global financial market. This includes incorporating new technologies and solutions that are taking shape as we speak — most coming from non-traditional corporate access players — that will more effectively and efficiently match the right buyers, with the right issuers, at the right time.
Are you prepared for a post-MiFID II world?