The European Commission (EC) on Thursday unveiled its latest draft of the Market in Financial Instruments Directive (MiFID) II proposals, which are designed to crack down on high-frequency trading and extend the Commission's regulation of the equities, commodities and derivatives markets.
Commenting on the EC release of MiFID II proposals, Munib Ali, director at PwC, said that they broadly mirrors the content of the December 2010 consultation paper.
Yet, despite the further clarity, firms may still be concerned about the substantial costs the regulation will impose and the detrimental effect on the bottom line.
“The burdensome transaction and trade reporting requirements will squeeze trading margins, while proposals to move derivatives onto regulated venues and central clearing will make it more difficult for companies to sell bespoke solutions to clients," Ali said. "Enhanced collateral requirements could further contribute to the decline of OTC trading."
He added that the provisions designed to allow increased competition and choice around central clearing come with hurdles that will be contentious, including the requirement for regulatory approval.
According to Ali, investment banks, particularly their fixed-income businesses, will feel the effects of MiFID II the most.
Severe strain will also be placed on the business models of high-frequency trading and commodities firms, who will incur higher implementation and operating costs to meet the heavy control and reporting requirements.
High-frequency trading firms will be particularly concerned by having to provide liquidity on an ongoing basis like market makers, revisiting their trading strategies and sharing these with the regulators.
“Despite a lack of clarification on the timeline, it is imperative that firms begin to make key strategic and operational decisions now to capture competitive advantages over rival institutions," Ali said. “Our experience shows that the industry is often focused on addressing individual regulations in isolation. Companies need to ensure they respond to MiFID II alongside other interdependent regulations, such as EMIR and Dodd Frank, tackling complex themes such as upgrade of data or improvement of reporting processes in order to take advantage of synergies and reduce implementation costs.”