Bigger Is Better: MiFID II Will Give Large Buy- and Sell-Side Firms a Massive Advantage

Despite the imminent deadline, many firms are still scrambling with the specifics of MiFID II’s requirements. Although buy-side firms expect to be ready for the Jan. 3 implementation, even the most advanced identified a significant number of gaps in their MiFID II implementations – in fact, TABB Group believes the majority of firms will not be fully prepared for the deadline. But one thing is becoming clear: Being bigger will be better, both in terms of compliance and competition.

With fewer than 90 days until MiFID II takes effect on Jan. 3, 2018, there is still much work to be done and many issues still in flux before buy- and sell-side firms can call themselves compliant. Declaring victory would be easier if all of the regulatory issues had been resolved and the complete set of rules defined. The problem is, they haven’t.

Buy-side firms are waiting on final details from European and US regulators about which US execution venues will be deemed equivalent according to MiFID II requirements, while US brokers are still searching for regulatory relief to accept direct payments for research. In addition, many buy-side firms are still trying to determine if they will pay for research out of pocket or charge it back to their clients, while investors and brokers are still working together to determine how to price research.

Despite the impending deadline, many firms are still scrambling with the specifics of fully complying with all of the requirements prescribed by MiFID II. Based on the 95 buy-side firms TABB Group interviewed in the first quarter of 2017 for our US Institutional Equity Trading study, we selected the 34 that described themselves as most advanced and had a new conversation about MiFID II issues and preparedness.

TABB Group interviewed those 34 European and US buy-side firms in the third quarter of 2017 about their preparations for MiFID II. European buy-side firms represented 65% of participants; US buy-side firms represented 35% (see Exhibit 1, below).

Exhibit 1: Participant Demographics

Source: TABB Group

The bottom line: Even though buy-side firms said that they expect to be ready for the Jan. 3 implementation, even the most advanced firms, when prodded for specifics, identified a significant number of gaps in their MiFID II implementations – so many gaps, in fact, that except for a few outliers, TABB Group believes that the majority of firms will not be fully prepared for the deadline and will still need to make adjustments well after the deadline has passed.

And with the public statements from regulators, it seems that they too are aware that firms won’t be fully compliant until later in 2018. Steven Maijoor, chair of the European Securities and Markets Authority, said in an October 2017 speech that “2018 is the starting date, but at the same time we should not forget that MiFID II implementation will keep the large part of the regulatory community and financial sector busy for many months afterwards.” Without anyone acknowledging it directly, the unsaid consensus is that full MiFID II compliance will not happen on Jan. 3.

Outside of the race to prepare, TABB Group expects that MiFID II will unleash dramatic change not only across the European marketplace, but globally, with one thing becoming clear: Being bigger will be better. Regardless of the many uncertainties around MiFID II, there is consensus that larger buy-side and sell-side firms will end up with a massive advantage over smaller and mid-tier shops. Not only will larger firms be better able to handle the cost of compliance, the new regulatory regime also will favor larger institutions as they move to separate research and execution costs.

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