One of the most burdensome parts of new trading and transparency rules in Europe will potentially benefit exchange-traded fund providers.
Sources said the increased transparency required by the Markets in Financial Instruments Directive II, which came into effect Jan. 3, might be to the benefit of ETFs and their providers in the form of demand for lower-fee strategies.
Marina Cremonese, a vice president and senior analyst at Moody's Investors Service Inc. in London, said MiFID II's focus on transparency will intensify fee competition in the money management industry.
"We see passive products and ETFs becoming low-cost commodities — not so much passive on one side, active on the other — more and more we see that asset managers are incorporating ETFs into traditional as well as multiasset portfolios to build flexible, liquid strategies. ETFs are used for cost and efficiency. This is why with additional transparency on volume and liquidity (under MiFID II), we expect greater use of ETFs by institutional investors," said Ms. Cremonese.
Ratings agency Fitch Ratings Inc. focuses on a number of specific elements of MiFID II when it assigns ratings to money management firms. ETFs "is certainly one of them in the sense that if MiFID is imposing increased transparency around fees on all products, we think directionally it could benefit ETF products to the extent they are lower-fee products relative to alternatives," said Nathan Flanders, New York-based global head of non-bank financial institutions at the firm. "Bringing that fee transparency out, we think, could influence flows and investor appetite."
Any fee wars that might appear in Europe follow those in the U.S., said Mike Venuto, chief investing officer and co-founder of Toroso Investments LLC in New York. He also said he thinks any rules that push for transparency, lower fees and more liquidity, "whether (U.S. Department of Labor) or MiFID rules ... benefit ETFs. I think it's impossible for a traditional asset manager firm to survive if they don't embrace this. This is a transformational shift in how people invest their money."
And the stretch for better value for clients' money under MiFID II might influence global money manager behavior. Under the new regulations, money managers are required to separate payments for research from those for execution of trades, with many Europe-based managers choosing to absorb the cost of these research payments themselves.
"Interestingly on MiFID we have a view that it may likely extend beyond the official regulatory sphere of the regulation and indirectly affect managers around the world, in the sense that if you see more managers in the European theater internalizing costs, it is natural that investors in other regions might go to their managers and say 'Why am I paying when others are not?' For international managers where they have European operations subject to MiFID and other (operations) that do not — but they purchase research on a global basis — (they may adopt) a global standard for some of the MiFID implications," Mr. Flanders said.
