Law360, London (August 9, 2017, 3:55 PM BST) —
An onerous incoming European Union regulation is the catalyst that drove U.S capital markets consultancy firm Tabb Group to expand in London, the firm told Law360 on Wednesday.
The international research firm said the revised Markets in Financial Instruments Directive, or MiFID II, had prompted it to bolster analyst numbers in Europe with its new office, which is now open, in anticipation of the “tremendous changes” the sweeping reform will bring.
“MiFID II continues to be one of the most popular and critical topics among our clients and community, and our new U.K. office enhances our ability to meet their need for high-value and timely research, insight and consultancy,” said Monica Summerville, head of Tabb Group European research.
The scale of the changes introduced after the original 2007 directive, which were driven by a desire for reform after the 2008 financial crisis, has overwhelmed firms and even regulators. The introduction of MiFID II has been so overwhelming that the European Union postponed it by 12 months until January 2018 as a result.
The directive is a complex set of rules passed in 2014 that governs the financial services sector, covering areas including trading, data recording and the need for transparency in firms’ research costs.
Tabb Group surveyed 20 buy-side heads of European equity trading — who manage accounts and make recommendations to clients — and found many in the industry are not still not ready for MiFID II.
The package has put enormous pressures on banks and businesses to ensure they will be compliant as they count down the four months to implementation. The costs to industry of complying with the directive are likely to go beyond €2.5 billion ($2.6 billion), with the bill to maintain annual compliance set to be more than €700 million over the next five years, Anna Griem, an analyst at management consultancy Opimas LLC, said in a report accompanying Tabb data earlier in the year.
Just months before MiFID II is implemented the European Securities and Markets Authority, which regulates securities activity in the bloc, is still investigating claims that so-called systematic internalizers — investment firms that execute client orders using their own capital outside regulated markets — can sidestep the directive’s obligations.
ESMA is worried that some firms are seeking to circumvent MiFID II by setting up networks of interconnected systematic internalizers and other liquidity providers, known as broker crossing networks.
Recent research by Tabb examining the systemic internalizer regime found that up to 20 equity SIs will be registered when MiFID II goes into effect, but that only a handful will offer competitive prices.
The group also found three-quarters of buy-side firms expect to trade via SIs from the start of the MiFID II regime, although they will do so in a tentative fashion, or leave that decision to their brokers.
Despite the concerns of regulators the industry says SI use will not be a way for it to avoid trade reporting obligations, according to Tabb.
More than two-thirds of the buy-side institutions TABB spoke to are building the capability to report trade themselves, the group said.
The regulator has proposed fees for recognized investment exchanges that operate trading venues. This is part of the requirement in HM Treasury’s laws that the operators join the Financial Services Compensation Scheme, which is the U.K.’s statutory deposit insurance and investors compensation program for customers of authorized financial services firms.
The consultation runs until Sep. 7, 2017, and the FCA said it would finalize the necessary rule changes by November 2017.
–Additional reporting by William Shaw and Richard Crump. Editing by Ed Harris.