How will Asian companies cope with Europe’s common standard on financial transparency?
Running to 7,000 pages with 1.7 million paragraphs, the regulations are far longer than Penguin Classics’ edition of the Dream of the Red Chambers.
As European financial services firms adjust to major new regulations, those doing business in Asia will also be affected, say analysts, as operational and market structure changes in Europe filter out around the world.
On Wednesday, the second Markets in Financial Instruments Directive (MiFID II) came into effect in Europe. Running to 7,000 pages with 1.7 million paragraphs, the regulations are more than double the Penguin Classics edition of the Dream of the Red Chambers, and much less readable.
But the rules will reach deep into the financial industry and transform the way business is conducted. They provide a standardised set of guidelines that govern how banks execute trades on behalf of their clients, how they report these trades, and how they are paid for, among other stipulations and provisions.
“The rules are not specifically intended to be extraterritorial - European regulators are bringing in new rules for European companies - but they will still have an impact,” said Keith Pogson, senior partner for financial services in Asia Pacific at EY in Hong Kong.
Companies operating outside the European Union will have to abide by the rules when they trade in European securities, or when they do business with European clients and counterparties
The medium-sized companies in Asia will feel the effects most, analysts said.
“The large international banks and asset managers have MiFID II implementation programmes including Asia that they have been putting into place over the past 18 months or so,” Pogson said. “Firms that are very focused on the region, say most Chinese brokers that primarily trade Chinese securities for Chinese clients, will probably not find it worth their while to trade European assets, so it will be the companies in the middle that will have greater difficulties.”
Nonetheless, regulators that will enforce the rules are likely to give these firms, and indeed all, a degree of leeway.
The UK’s Financial Conduct Authority, which enforces the rules in Britain, will not take action on January 3 against companies that are not fully compliant, as long as they can show they had taken steps toward meeting their obligations, said the authority’s director of enforcement Mark Steward in a speech in September.
Furthermore, “A medium sized broker in Asia that trades in a few European securities going to be pretty far down the regulators’ target lists,” said Pogson.
Beyond the nuts and bolts of conducting a trade, the new rules will also affect the broader market. One change is that investment banks will have to charge their clients separately for executing trades on their behalf and providing equity research. Until today, banks have bundled the two charges together.
The change should mean asset mangers are more selective about what research they receive since they will either cover the research costs themselves directly, or pass them on to their end clients.
If buy side firms have to pay for research individually, they are also likely to request less of it.
Global spending on research will fall by 25 to 30 per cent in the next three or four years, according to an estimate by Quinlan & Associates. This will have a knock on effect for the banks.
“As clients will be less willing to pay for waterfront coverage from more than a handful of providers we anticipate that the banks will start to make cuts and focus their research on sectors or geographies where they can have a leading position,” said the company’s chief executive Ben Quinlan.
This will have a knock-on effect on jobs.
“A middle of the road equity analyst at the moment probably has a shelf life of about a year,” said Pogson.