Custodians Escape MiFID II, But Future Regulation Could Force Unbundling of Services

In the longer term, future EU legislation could require custodians to separate the pricing of packaged services, adding to the implementation workload, says HSBC Securities Services' EU regulatory affairs specialist, Henry Raschen.
By Janet Du Chenne(59204)
In the longer term, future EU legislation could require custodians to separate the pricing of packaged services, adding to the implementation workload, says HSBC Securities Services’ EU regulatory affairs specialist, Henry Raschen.

The European Council, Parliament and the Commission met in January to reach an agreement on MiFID II and to conclude which instruments should be included into the regulation and therefore onto the exchanges, the multilateral trading facilities and the organized trading facilities (OTFs) and the trading of non-equities on those OTFs.

Raschen explains that, following the recent MiFID trilogue, safekeeping will remain an ancillary service and not become a core investment service as was once expected by many in the industry. He notes, however, that EU Commission staff have indicated that they still intend separately to reclassify safekeeping as a core investment service in due course. “Any delay in reclassifying is likely to be temporary—safekeeping may well still become a core investment service in the medium term—but the delay does just slightly reduce the current implementation workload for custodians,” says Raschen.

He adds that if safekeeping were to move to being a core activity, the structure of the service could change. “We don’t yet have the final text, but Article 24.7 of MiFID II—as now agreed—requires investment firms in some cases to unbundle packaged services and price them separately,” says Raschen. “This would reinforce a trend to unbundling that there has been in some quarters over the past few years.”

Raschen explains further that under MiFID I (from 2007) inducements such as commissions and dependent fees became disclosable to clients. He goes on to say: “Now, except in de minimis cases, Article 24.6 is moving much more towards a prohibition of any such fees for investment firms and independent financial advisors, and that this provision could potentially apply to safekeeping services too if these services are eventually reclassified as a core investment service”.

The regulation has largely impacted pre-trade space, with uncertainties relation to the definition of infrastructures and which instruments should be traded through them. Anthony Kirby, director in the Financial Services Risk and Regulation team at EY says: “The controversial questions that are left unanswered by the agreements are not insignificant. What MiFID II will mean for venues, dark pools and High Frequency Trading will depend on them. The precise agreement on definition of the organized trading facility category, the treatment of commodity trading, in particular oil and gas and agriculturals, and the treatment of third countries are all still to be negotiated. All of these outstanding issues could greatly impact the cost to industry. We estimate that MiFID I cost the industry about £2 billion to implement, MiFID II looks to be as expensive if not more and the final cost will depend on the finer details which are yet to be agreed.”

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