Money managers interviewed by TABB Group said gaps remain in their preparation for Markets in Financial Instruments Directive II with just over two months to go before the Jan. 3 effective date, but few of them think European regulators will crack down on violators immediately.
The 34 European and U.S. managers interviewed in the TABB report, "Racing Against the Clock: How Buy-Side Firms Are Preparing for MiFID II," said they would be ready to comply with MiFID II by the start date, although work still needs to be done on how they will proceed on unbundling research and execution costs — particularly among the 22 European-based money managers interviewed. While 82% of the 12 U.S.-based firms had discussions with their clients, only 50% of the European managers had done so.
"The gaps (in preparation) really stood out on research and unbundling," said Valerie Bogard, equity analyst at TABB and co-author of the report. "Europeans have not done as much client talk, but the nature of the talks in the EU and in the U.S. are very different. The U.S. managers have had more ad hoc discussions with their clients. European managers have more stuff they have to cover and that will require an overhaul of their systems. All of that takes more effort to coordinate. They just want to make sure they're notifying clients in an organized way."
But many managers think regulatory compliance audits and fines assessed by European regulators won't happen immediately. Thirty-six percent of all managers said audits would not happen until 2019, a year after MiFID II will be implemented, while 28% said they would begin in the second half of 2018, 12% said they would start in the first half of 2018, and 24% didn't know.
In penalty assessment, 32% said they would begin in 2019 and 23% said they would start in 2020, with 9% each saying they would begin in the first or second half of 2018; 27% didn't know.
Ms. Bogard said the delay in conducting audits and imposing fines is similar to what happened earlier this year when U.S. and European regulators eased requirements for some uncleared over-the-counter derivatives to comply with a March 1 deadline to use mark-to-market margin.
"We have heard from regulators that that's what they're thinking as well," she said. "As long as there's evidence that (a manager) is taking steps to comply, they won't file something against them. It took regulators a while to give specifics on these rules, and market participants are still waiting for some clarification information."
Among the other findings in the report:
71% of European managers and 50% of U.S. managers had unbundled their research and execution costs;
All of the European managers have had discussions with research providers on pricing vs. only 36% of U.S. managers;
52% of European manages will reduce their execution rates while only 5% will increase them, compared to 42% of U.S. managers decreasing rates and 8% increasing them; and
55% of European firms will trim their list of execution brokers and 41% will keep the number as is, compared to 67% of U.S. firms reducing their broker lists and 25% keeping them the same.
The complete report is on TABB's website.