Global markets are counting down to their biggest reform in a decade.

January 3 marks a defining moment in financial regulation, the much anticipated introduction of a revamped version of Europe’s Markets in Financial Instruments Directive, more commonly known as Mifid II.

The gigantic piece of EU legislation, more than seven years in the making and containing more than 1.7m paragraphs of rules, will affect every corner of the continent’s financial services system — from banks to brokers, asset managers to pension funds, stock exchange operators to retail investors.

At its heart, Mifid II is designed to offer greater protection for investors and inject more competition into the trading of all asset classes, including equities, fixed income, commodities, futures and exchange-traded products.

But many firms and member states are not fully ready for implementation, despite massive spending: preparing IT systems was expected to cost more than $2bn in 2017 alone.

Some critics are asking if the changes, which will affect investors well beyond Europe, will unnecessarily complicate and fragment markets.

“I think it’s the worst piece of legislation I have seen in my career,” Jeff Sprecher, chief executive of Intercontinental Exchange said early last year.

The directive’s reach into virtually every European traded asset and market will also stretch around the world.

In the US, some local regulations already conflict with the thrust of the new European rules. In time, the directive may come to be seen as the turning point, good or bad, for thousands of finance jobs.

“Mifid will bring capitalism to capital markets,” said Mark Pumfrey, head of Liquidnet Europe, an equity trading venue, who argues that the current system props up inferior business models. “Mifid will force firms to differentiate or die. Best-in-class will thrive and rise to the top.”

For many firms, one of the biggest changes requires asset managers to “unbundle” the cost of investment research from that of executing trades with banks and brokers. The aim is to reduce the potential for conflicts of interest.

In recent months, this particular change has sparked fierce debate over the worth of research as external analysts sat down with asset managers to thrash out how much the latter would pay. Traders at banks say market liquidity has been affected because they have been distracted by lengthy discussions with customers.

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Source: Financial Times



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