Europe Financial Regulation in 2018

Regulation is sweeping across Europe just as the United States has attempted to deregulate its markets. The difference is that Europe is attempting to create a single market that can compete with the US markets, while the US does not have the same issues. The goal of the MiFID II, which was launched in early January of 2018, was to enhance the current framework of the pre-existing MiFID across multiple markets including equities, fixed income, currencies and commodities. The new legislation will provide a more liquid, and transparent market across the EU.

New Reporting Requirement of MiFID II

New reporting requirements and tests will provide a fairer and safer marketplace that provides transparency to all market participants. New regulations will reduce the use of dark pools and over the counter trading.  Dark pools are exchanges that match buyers and sellers, but do not produce listed transactions. High frequency trading will need to observe strict organizational requirements that will include provisions for equal access to central counterparties which will increase competition.

Governance Will Increase Substantially

Protecting investors by requiring independent investment advice will eliminate any pay to play mentality that covered the markets in the past. The United States created the Chinese wall between analysts and investment bankers to reduce conflicts of interest. The new MiFID II will create similar rules as a brokerage firm. Firms where you pay a commission will no longer be able to provide you with specific stock picks. Brokers will have to offer independent analysis which will help to eliminate any ‘pay for play’. Brokers will also be responsible for their employee’s conduct regarding cross-selling and execution of products.

Prior to January 2018, investment managers receive written reports and phone calls from analysts without having to pay for the research. The research was built into the trading fees which would often get paid by a third party.  This allowed managers to eliminate this from their budgets, which reduced the costs of doing business. Going forward, managers will not have to budget a separate line item for research.

The new regulations will provide clients with a benchmark which can show evidence of performance relative to other brokers. Costs will become front and center as opposed to just returns. If you see 2-brokers performing the same but one is charging you double, you know you are getting ripped off. You can also monitor volatility through Vestle trading conditions.

How Far Reaching is the MiFID II

The objective of the MiFID II is to provide transparency to clients who are participating in the capital markets. By showing every trade, the opaque qualities that existed prior to 2018 will disappear. The new time stamp in conjunction with record keeping will allow investors to feel that the market is a fair and efficient place to look for long term returns.

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