Mifid II raises concerns over cost of regulation

Squeezing_orangeTransaction and trade reporting requirements will squeeze margins and selling certain financial instruments to clients will become more difficult as new regulation is about to be implemented, PriceWaterhouse Coopers (PwC) warns.

The European Commission just released the Market in Financial Instruments Directive (Mifid) II proposals, a revised set of rules for the investment services in Europe. Despite providing further clarity, it heightens concerns over the cost of regulation.

Proposals to move derivatives onto regulated venues and central clearing, for example, are likely to make it more difficult for companies to sell those solutions to clients. Meanwhile, enhanced collateral requirements could further contribute to the decline of over-the-counter trading.

Munib Ali, director at PwC, says even though the second version of the proposals mirror the December 2010 consultation paper, firms are still concerned about the “substantial costs the regulation will impose and the detrimental effect on bottom line profitability.

Ali says although the provisions are designed to enable greater competition and choice around central clearing, they come with hurdles that will be “contentious”, such as the requirement for regulatory approval.

He expects investment banks in general, but their fixed income business in particular, to be impacted 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 in order to meet the heavy control and reporting requirements,” Ali says. “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.”

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