Global banks are facing a new challenge in their Asia-Pacific trading businesses from an unexpected direction — EU markets rules that are forcing change in dealing rooms from Singapore to Hong Kong to New Delhi.
Banks and asset managers in the EU have spent years preparing for the EU investor protection rules known as Mifid 2 that are due to come into force at the start of 2018. The changes involve a heightened administrative burden and structural challenges such as having to charge clients separately for research.
But some global banks have concluded that they have to apply the new rules in Asia, bankers working for large institutions in Hong Kong told the Financial Times. That will push up costs in the only region where the top 12 banks’ securities revenues fell last year, according to data from Coalition.
Some Asian banks will also have to apply some of the rules and they too have begun preparations.
The Mifid 2 rules hit banks in APAC when they sell financial instruments to EU clients, or offset trades with an EU entity or appoint an EU distributor for financial instruments manufactured in Asia, lawyers at Clifford Chance wrote in a recent client presentation.
Even banks that are not technically captured by those — or other — criteria, may chose to comply with the rules, which are seen as giving more protection to investors, bankers say.
“Most global investors say we are global, we cannot apply European standards in Europe, different standards in APAC,” says one senior markets executive based in Hong Kong. “Local clients . . . they like the protection Mifid 2 gives”.
The Clifford Chance document cites the rules that can affect the way investment banks in APAC price and disseminate research to the venues they use for trading, how they market investment products and how they do algorithmic trading.
A regulatory expert at an institution with a large APAC presence says that the biggest impact for EU banks in the region would be rules around equity and derivative trading, with “transaction reporting coming a close second”.
The Mifid 2 rules restrict trading of some equities and derivatives to EU venues and the transaction reporting rules prevent banks from doing business with clients who do not already have an internationally recognised identification number known as a Legal Entity Identifier (LEI).
The biggest challenge might be the research payment issue if providing research to EU investment advisers/portfolio managers, or otherwise the generally increased investor protection requirements
The changes to the equity rules come at a time when that business has been particularly challenging for some banks in APAC. Credit Suisse recently culled more than three dozen of its staff in recent months due to under-performance.
“Equity businesses at this very point in time are under the microscope across the board,” says Chris Wheeler of Atlantic Equities. “Clearly if anything is not making money there is going to be another big question mark about do we want to be in there.”
Keith Pogson, EY’s senior partner for financial services in Asia, said some brokers with EU parents are already booking more trades in APAC to avoid the eventual impact of Mifid 2.
Simon Crown, a London-based lawyer with Clifford Chance who met with banks in Hong Kong and Singapore last week, says most banks in APAC were aware of the issues surrounding Mifid 2. He adds that banks that produce financial instruments still have “some work to do” in areas such as the new governance rules, which require banks to identify target markets for their products.
“For APAC banks with EU clients the impact is much lighter,” the regulatory expert at a large bank added. “(The) biggest challenge might be the research payment issue if providing research to EU investment advisers/portfolio managers, or otherwise the generally increased investor protection requirements.”
Eight of the largest international banks operating in Asia declined to comment on their plans to implement Mifid 2 in the region, as did most major Singaporean and Japanese banks and several Chinese.
Richard Ziegler, the UK head of Chinese brokerage CLSA, said its conversations about Mifid 2 had “progressively become global” and that the firm was “ready to operate within whatever structure our clients choose to adopt, either in UK/Europe or globally”.
A Tokyo-based spokesman at Nomura said the bank is “working closely with clients who need to follow the new rules so the transition can take place smoothly”.
Andrew Douglas, chief executive of derivatives repository at industry utility DTCC, said APAC banks with EU parents could struggle to make sure all of their clients apply for and receive LEIs before the deadline, as required by Mifid II.
“The larger (client) firms should be educated by January 3,” Mr Douglas said. “The issue is going to be at medium and small firms.”
Additional reporting by Jeevan Vasagar in Singapore and Leo Lewis in Tokyo