MiFID II and the FinTech Goldmine
MiFID II is an ambitious piece of European legislation that came into force on the 3rd of January 2018. It is a comprehensive restructuring of the original Markets in Financial Instruments Directive which initially came into force in November 2007.
The need for a complete restructuring of the MiFID legislative program was born out of the 2008 financial crisis. A system that combined an unsupervised regulatory structure with a banking culture that strived to cultivate profit at any cost eventually came crashing down around itself. Exemplified by the fall of financial giants such as Bear Sterns and Lehman Brothers, the global financial outlook was bleak. With conditions unparalleled since the 1930s, it was clear that the original MiFID had not succeeded in creating a ‘common, robust regulatory framework that protects investors.’[i]
As a direct result of the failings of the original MiFID programme, MiFID II has a much broader scope and more far-reaching consequences for a wide variety of market participants across the financial services sector than its predecessor. As a result of this wider scope, a plethora of business opportunities have materialised for companies operating in the financial services sector. A sizeable portion of these new business opportunities are intrinsically linked to the ever-expanding FinTech sector.
‘FinTech’ is broadly defined as: “Computer programs and other technology used to support or enable banking and financial services.”[ii]
Banks and other professional institutions already rely heavily on FinTech to satisfy their business requirements. We can already see evidence of how FinTech has helped satisfy customer needs in the retail environment. There has been an explosion in the use of applications such as PayPal, Apple Pay, and general all-purpose online banking applications in the retail sector. Unsurprisingly, the giants of the investment banking world have not been slow to utilise new and innovative technologies available in the sector. Electronic payments, algorithmic trading and instant communication networks are highly prevalent and inherently valuable across the financial services sector.
MiFID II, and the increased importance placed upon compliance with regulatory rules in the post financial crisis environment, has exponentially increased the challenges faced by key players in the financial services sector. For example: Limits have been placed on dark-pool trading, investor protection is more closely scrutinised and the number of transaction reporting fields that firms must satisfy has increased dramatically to more than double the pre-MiFID II total. The MiFID II regulation is several thousand pages long with over one million paragraphs. It is therefore no surprise that many of these potential problems have also created business opportunities for FinTech enterprises in equal measure.
FinTech providers will benefit from the introduction of MiFID II in a variety of ways and will seek to seize any opportunities that arise from this legislative behemoth. FinTech firms that have already been established for a number of years and trusted by market participants may expand or augment the services that they already offer. MiFID II will also be the catalyst for an increase in the number of niche and modular offerings across the FinTech landscape.
A pertinent example of an already well-established company aiming to benefit from the introduction of MiFID II is Bloomberg. Synonymous with worldwide Investment Banking for many decades, Bloomberg is using MiFID II as a way to expand upon an already widely-adopted and highly trusted brand-name. Bloomberg state that they offer a number of bespoke MiFID II solutions across “data, analytics, order management, reporting and trading platforms”[iii]
However, one of the most interesting aspects of Bloomberg’s MiFID II offering comes in the form of a brand new trading venue – Bloomberg MTF. One of the key aims of MiFID II is to encourage a more open and transparent trading environment by ensuring that orders are executed on a MiFID II appropriate venue such as a Multilateral Trading Facility (MTF), Systematic Internaliser (SI) or Regulated Market (RM). An MTF, like Bloomberg’s new offering, is a trading venue where orders are matched systematically in a multilateral fashion, bringing buyers and sellers together in one place. Bloomberg MTF is a brand new example of this type of trading facility that has been created as a direct result of the MiFID II legislation. Financial institutions that already have access to the Bloomberg Terminal will now also have access to this trading facility. Consequentially, these market participants will have access to a greater scope of liquidity and a variety of quotes across more of the market thanks to Bloomberg MTF. This is a major example of a FinTech provider using the demands of the new legislation to its advantage.
Financial institutions frequently rely on external research before executing a trade. Another key aspect of the MiFID II programme is the unbundling of research costs. Put simply, in the post MiFID II environment, the buy-side will have to be more selective regarding the research that they benefit from. MiFID II demands that paying for research must now be a more transparent and formal arrangement. Accepting unsolicited research will be seen as an inducement and against the regulatory rules. Applications with the ability to evaluate, organise and present relevant research in a consolidated format to the buy-side are therefore invaluable. ‘Feedstock’ is a new market participant that has launched a product to satisfy the demand in this space.
Feedstock is a company that has developed software allowing participants on the buy-side to see all their potential research in one place in a standardised format. This collation of research into one place allows more cost-effective decisions to be made. Feedstock assert that their clients are “more agile, more competitive and boast leaner operations”[iv] than their competitors. This is yet another example of a FinTech provider taking full advantage of the introduction of the new legislation.
Turning potential problems into business opportunities will be a relentless profit machine for FinTech providers in the months and years following the implementation of MiFID II. While the two examples above touch upon two aspects of MiFID II (trading venues and research payments) there are countless others that FinTech firms will seek to benefit from. The regulatory changes presented by MiFID II are far-reaching and impact the entire financial services spectrum. As the dust settles throughout 2018 we will undoubtedly see FinTech firms continue to mine the lucrative pit that has been created by this uniquely complex and paradigm shifting piece of legislation.