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It has been the exposure of weaknesses in the functioning and transparency of the financial markets during the financial crisis which has led the European Commission (EC) to review legislative proposals, increase capital market transparency and protect against market abuse.
The Markets in Financial Instruments Directive (MiFID) was amended with the goal of strengthening the transparency framework for the regulation of markets in financial instruments, including where trading in such markets takes place over-the-counter (OTC).
The EC’s justification is that increased transparency boosts investor protection, reinforces confidence, addresses previously unregulated areas and ensures that supervisors are granted adequate powers to fulfil their duties.
The impact of MiFID II
Once MiFID comes into force in January 2018, it will no doubt have a profound impact on capital markets in several ways, such as on pre and post-trade disclosure and transaction reporting.
Sell-side firms look to pitch and sell assets and opportunities, whilst buy-side firms hold capital and therefore buy assets and opportunities. Currently, sell-side firms sell bundles to clients which include multiple services – one of which is sell-side research. Sell-side analysts give buy/sell recommendations in their research, which is available in the public domain. Buy-side analysts use this research to take their own analysis further in reports which are not publicly available.
The benefit of unbundling such fees is greater transparency for clients, who can now benefit from a more tailored service. However, it is likely that many companies will now forgo paying for research, thinking it unnecessary. The knock-on effect of this change will be on contracts in the research industry, meaning that companies may find that they are no longer receiving the breadth or quality of sell-side coverage they are accustomed to.
The opportunity of MiFID II?
This is where opportunity arises. Companies which have traditionally relied upon sell-side channels to keep investors informed (particularly small and mid-cap stocks) must get more savvy with best practice engagement through communication channels such as the corporate website and annual report publications.
More than ever, companies must ensure that their equity story and latest business developments are communicated effectively and consistently through the website in order to avoid diminishing relationships with investors. Furthermore, it is imperative that the annual report becomes concise and decluttered, focusing on material issues and clearly explaining the strategy of the business, whilst being open with how this will be achieved, and the targets, risk management and measurements used to track progress.