One of the most recent and highly transformative legislative frameworks in Europe is MiFID II\(-\)the Markets in Financial Instruments Directive II. The set of regulations has come to power as recently as on January, 3rd 2018, disrupting almost every participant of the financial industry. The directive aims at increasing investor protection as well as improving transparency, efficiency and resilience of European financial markets. However, increased transparency often comes at a cost: financial advisories are not to accept rebates for providing “sponsored” advice unless it is in the investor’s best interest and the fees of the investment companies are to be split into components and disclosed accordingly, which brings to light formerly hidden costs that most companies tend to choose to take upon themselves. These processes create a downward pressure on the conventional investment companies’ margins and influences them to either turn to ETFs as a low-cost solution or take on a full-scale digital transformation of the business.
Interestingly, the ETFs are a subject for regulations as well. The MiFID II is believed to highly benefit this type of funds, as the legislation requires that every transaction is reported, which would in turn lead to better informed decisions made by investors as well as creating a competitive offering to the US exchange traded funds. However, there is a pitfall, cleverly highlighted by a recent article at Bloomberg. The authors argue that the transparency enhancing efforts may be held out by the lack of a unified system for reporting ETF transactions (consolidation tape). Creating of this space is an uneasy task, as each ETF would be likely to report their data in a different manner. Indeed, the legislation requires the data to be available, but does not specify how easy it would be to access it. Currently, some efforts are already under way to create a unified space for ETF trades, but the regulator is to appoint a company itself if the consolidation tape does not exist by 2020.
Therefore, there are at least two more obstacles on the way to making ETF funds a viable and transparent alternative to conventional analyst-driven investing with ailing margins: the lack of consolidation tape and the lag, which will inevitably last before the industry makes sense of the new rules of the game. Thus, it is rather unlikely that entering the ETF industry would be a rock-solid strategy to overcome the pressure of MiFID II at least in the short run.
Bloomberg \(-\) The MiFID-Driven Boom Seen in Europe ETFs Has One Major Flaw