Citi 2018 FinReg Outlook

After MiFID 2: Four Key Things to Watch In the wake of MiFID 2, the industry navigates the changed landscape and adjusts to the brave new world. On 3 January, EU markets entered the brave new world of the Markets in Financial Instruments Directive (MiFID) 2. Its sweeping scope has major implications across the European marketplace and beyond. However, it will take a while before the precise impact, both intended and unintended, becomes clear. Here are four key issues to watch: TRADING TRANSPARENCY COULD DRIVE TAILWIND FOR EU ETFS The rise of the global Exchange-Traded Fund (ETF) industry has been one of the key trends over the last decade. While the growth of the EU ETF industry has lagged behind the US market, two elements of MiFID 2 may change this. The first is the focus on trading transparency. Historically the market was opaque with approximately 70% of European ETFs are traded over-the- counter. However, firms are now required to report transaction details such as trade volume and price. The increased transparency will aid in price discovery and improve liquidity. It may also drive more ETF trading on exchanges. This could make it easier to lend ETFs and make them more acceptable as collateral, which could boost demand. The second is that payment of commissions to independent advisors for fund sales is now prohibited. The ban on fund commissions is part of a larger global trend, which has seen similar initiatives proposed or implemented in various countries, including the UK, the Netherlands, and the US. Some in the industry have speculated that the shift away from commission-based sales will boost the attractiveness of low-cost products such as ETFs and passive index funds. While it will not be overnight, MiFID 2 may prove to be the shot in the arm the EU ETF industry needs. STRICTER PRODUCT GOVERNS LEADS TO DISTRIBUTION DISRUPTION Asset managers and distributors are now subject to far more rigorous product governance requirements. Under the new rules, asset managers must identify the appropriate target market for the fund and define the suitability requirements for the end investor. This is an ongoing commitment, and asset managers must work closely with their distributors to ensure the product remains suitable for all their end investors. There is also an onus on fund distributors and SEAN TUFFY Head of Market and Regulatory Intelligence, EMEA, Custody & Fund Services EMEA 1 2 27 26 Citi Custody & Fund Services – FinReg Outlook 2018