Mifid – the topic that is impossible to avoid.
By Richard Matthews October 15th.
With less than 90 days to go to the implementation of Mifid II in Europe it feels that at long last people are waking up to the fact that wide ranging changes throughout the financial markets are going to happen. No arguments no more delays, when the bell rings on the first trading day of 2018 we will all enter a brave new world of regulation. Everything from the way research is disseminated, prices are quoted and foreign exchange is reported will change. To old market hands the scope and range of the changes are quite awe inspiring and at times look as if they have been designed purely for the regulator to interfere and have oversight on parts of the market that they have never been able to influence before. That’s is certainly not saying that there are areas that previously they should have looked at in more depth, such as the obscenity which is binary options that still trundles along seemingly unencumbered by any thought to the poor people that get conned.
On January 3rd 2018 the whole of the financial services business will enter a brave new world of increased regulation and oversight from our Lords and Masters – the regulator. Already delayed by a year this tome, running to 17,000 pages and 1.5m paragraphs , that is 17 times longer than the longest book I have ever read. Cervantes classic Don Quixote weighs in at just under 1000 pages and at one point was said to contain every word in the Spanish language. Enjoying challenges and being somewhat cocksure of myself I announced to my late mother that I was going to read it I Spanish. Mothers being Mothers she only bought a copy in Spanish and thus I was cornered. I had to read it and I did. I recommend the book to anyone who wants to understand the Spanish psyche, a good read and to strengthen their wrists. Boy it’s a heavy book in more senses than one. My mother sadly is no more but even her wicked sense of humour wouldn’t have included a challenge to read all of Mifid II. There are those amongst whose job is to get to the nuts and bolts of the regulatory changes and they have been excitedly pouring over the detail of it for some time .
When you put Mifid11 into a search engine over three million results are available to you, many of which are compliance related. Now I come from an era where there was a very light, indeed too light , touch on compliance and market abuses certainly occurred. But these abuses were mostly treated internally by the market participants and a compliance officer was more often than not called to advise on a trade that had taken place not, as now, an impending trade. Is it OK to do this trade is the thought uppermost in a brokers mind these days.To me the markets are now over regulated and are only getting worse.
Some regulation seems designed to hamper the markets and ironically harm the very people, the small investor, which it was intended to protect. Transparency has always existed in the wholesale markets and if a broker tried to hide a price he would surely be found out. On many occasions a broker will have a market (in no particular instrument) of, let us say, 92-96. You can quote 92-96 till the cows wander home and not trade. The broker who closes the price to 93-95, previously flirting only with a difference but now also with the regulator, will trade. He has taken a market risk through his skill and knowledge, tightened the market and hopefully facilitated a trade by doing so. Under Mifid he will have to be imaginative in how this is executed. Would dealing tops and bottoms really help the small investor? I don’t think so as the worsening in the price will always be passed down to them.
The treatment of forward foreign exchange commitments is another area of confusion. For years a forward FX transaction in the UK has been routinely regarded as a transaction for commercial reasons, under Mifid 11 this is no longer the case as a definite reason and end date on the forward has to be known or the transaction is seen as an investment and falls under the FCA regulation. By taking this stance a number of brokers who acted under e money and payment directive licences are being forced to upgrade their licences and will fall under the FCA. What does this change achieve? There was the odd bad apple using deliverable FX forwards for speculative reasons, God alone knows why, without “specialist advice and oversight” but they were routinely weeded out as the executing broker knew and understood the dangers.
A lot has also been written about the restrictions on stock market analysts who, with all due respect to them, are not the most exciting of beings. But they serve a purpose to the general public and their advice trickles down into people’s pension pots and everyday lives. With the new rules on research their activities will be curtailed and not only will individual investors be harmed but also the smaller companies that they used to cover will be cut out of research as brokers become more cost conscious as they will be unable to charge for the research. When I ran out of good excuses to avoid writing this article I started to ask contemporaries in compliance for their views on Mifid. Contemporaries in compliance is a phrase I thought I would never utter but I find increasingly that a fair few of my old broker and trader chums are involved in the dark arts of compliance and there lies the danger. Not the danger of poacher turned gamekeeper but the danger that now traders and brokers find it harder and harder to make a living due to often over zealous regulation and its cost. Cost, now there lies the issue. How much did the faceless Mandarins earn creating Mifid 11 and all the three letter acronyms associated with it? Please no more TLAs. How much is all this regulation costing to implement? Two questions that are nigh on impossible to answer. As the costs and implications of the implementation grow ever larger, and nearer, two things about Mifid are certain. Firstly the regulators are safely behind their desks and enjoying life thanks to our generosity. Secondly and more pertinently trading volumes will initially decrease and costs will increase, the profitability of the larger participants and the very people, Joe Public, that Mifid was designed to protect will suffer as a result . What a great idea Mifid was a new regime seemingly without any cost benefit analysis, you couldn’t make it up could you? They have though, haven’t they?
Richard Matthews, who began in career in 1973, is a former trader-broker in the London money, futures and foreign exchange markets. Twitter @dickiematthews5
This column is the opinion of the author and does not necessarily reflect the opinion of LiveSquawk.