MiFID II is the largest and most complex piece of legislation to hit financial services since the original Markets in Financial Instruments Directive came into force in 2007. Drawn up by the EU after the 2008 financial crisis, MiFID II is a significant and wide-reaching reform of the market for financial instruments and it comes into effect on January 3rd 2018. Despite being a European directive, its impact will be global.

Changing the investment landscape

All financial participants in Europe on the sell-side and the buy-side and those in between will be preparing themselves by getting to grips with the MiFID II requirements and the changes they need to make to their businesses in order to comply. There’s a lot of work yet to be done before January and it’s no easy task; the rules are complex, potentially touching many aspects commercially and operationally and big decisions must be made. Technology is undoubtedly going to play a big part in enabling firms to effectively implement the changes needed to meet the MiFID II requirements.

But it’s not just firms inside the EU that need to brace themselves. MiFID II will also impact global firms interacting with EU participants.

Preparing for impact

It is expected that the direct legal effect of MiFID II on institutions outside the EU will be quite limited but they need to be aware of the changes which could have an indirect impact on their business. Certain business practices that are common among global investment managers will need to be reassessed in light of the new regime, particularly around research, transaction reporting, record keeping, best execution, and reporting.

There will also be so-called ‘second order’ effects of MiFID II, where behaviours among European participants will change as a result of the regulation. This means that those who conduct business inside the EU will need to be seen as MiFID II friendly when transacting with their European counterparts.

Time is of the essence. Any investment firms planning to undertake MiFID II-regulated business in another European country have until December 2nd 2017 to apply for a passport that provides the necessary authorisation. Firms that miss the deadline risk not having a passport in place in time for the implementation of MiFID II, leaving them unable to trade with their counterparties in the European market. MiFID II has a broader scope than its predecessor, so some firms may also need new authorisations or regulatory permissions ahead of making a passporting application.

Global considerations

With many markets and institutions now operating across borders, questions have been raised about how global financial firms will deal with MiFID II.

So far, some firms are understandably focused only on implementing the changes for their European operations. Others, particularly larger investment firms, are taking a more strategic and uniform approach for efficiency and consistency by applying the MiFID II regulations beyond their operations in Europe.

Non-EU firms need to look at how they interact with the EU at the moment, whether that’s EU clients or trading EU products, and the MiFID II related issues that triggers.

It’s not proving entirely straightforward, with some questions being left unanswered. For example, under MiFID II investment managers will have either to pay for research themselves or by a separately identifiable charge. For many large investment houses with global operations, the decision on how to do this has been hampered by divergent rules in the US and Canada, and in Europe. In the US and Canada, brokers are prevented from receiving direct payment for research unless they are registered as investment advisers. A global model of payment for research might be established, but it’s unlikely to be before the January deadline.

Threat or opportunity?

Some are predicting that MiFID II could throw global trading into turmoil unless the EU acts fast to ensure its new rules have equivalence with other regimes around the world.

MiFID II will certainly affect how traders, brokers, analysts and fund managers interact far beyond EU borders. But while MiFID II is a significant challenge for investment firms, its intent is to drive changes that will ultimately benefit end investors.

The strengthened requirements around communication, disclosure and transparency for investors create opportunities for firms to use technology to increase trust, engagement and relationship with clients. It’s also possible that the unbundling of research and renewed focus on best execution could mean better returns for end investors – something that could foster greater trust and confidence in the financial services industry as a whole. It also focuses the mind of the client (both the wholesale and retail client) on value when weighing up cost against service.

Firms can either see MiFID II as yet another piece of regulation, or think of it as a chance to distinguish themselves in the market. Ultimately, this is about creating competition, choice and value for money.

After the dust has settled

MiFID II has certainly given those providing investment services around financial instruments a lot to think about – and a lot to do.

It will bring radical change and disruption but firms will adapt, and once the dust has settled a new world will emerge built on best practice.

Could we see a new global standard? No doubt markets and regulators around the world will be watching the arrival of MiFID II very closely and it will be interesting to see what happens in 2018 and beyond.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.