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Canadian asset managers are fretting over if – and how – they should respond when a sweeping set of European financial reforms comes into effect in 2018.peshkov/Getty Images/iStockphoto

Canadian asset managers are fretting over if – and how – they should respond when a sweeping set of European financial reforms comes into effect in 2018.

The new regulations, which are referred to by the acronym MiFID II, were born in response to the 2008 financial crisis. They are set to transform the business of trading securities across Europe, with implications for investment banks, brokers and fund managers around the world. Starting Jan. 3, 2018, the new rules will be imposed on everything from high-frequency trading to commodity derivatives trading to bond trading.

But even Canadian firms that don't have to comply with the new regulations say they are keeping tabs on what's happening in Europe. That's because the processes and information-technology systems being installed will soon raise the bar for what's considered "best in class" around the world, potentially putting the Canadians at a competitive disadvantage.

"If you talk to asset managers anywhere around the globe, the single biggest thing that they are watching right now is MiFID, whether they think they're directly impacted or not," said Doug Clark, the head of research in Canada for Investment Technology Group Inc.

That's because when European firms travel beyond their borders to compete for new funds, "they're going to use the MiFID standard as a marketing pitch," Mr. Clark added. "Those who don't legally have to be at a MiFID standard are going to have to be there in order to get new assets."

Perhaps one of the most-talked-about aspects of MiFID involves how asset managers pay for the research reports they use to make their investment decisions. In the past, asset managers have received research from their brokers in exchange for sending them trades to execute. But MiFID requires fund managers to pay for research and trading separately, a practice referred to as unbundling.

The unbundling of trading and research isn't just taking place in Europe, however.

In a recent survey of 100 mostly buy-side traders and portfolio managers, 17 per cent said that their firms are already fully unbundled today and another 44 per cent said they are planning to unbundle in 2018 or some time after. The poll was conducted by ITG last month at a trading conference in Toronto.

Mr. Clark says the big banks would prefer that a price tag isn't put on their research.

"Once you go out and tell a client, 'Hey, our research is worth $500,000,' you're going to get $500,000. The chance of the old style where the client might pay you $1-million for research that's worth $500,000 goes away," he said.

Other highlights from ITG's survey include:

  • 84 per cent of those surveyed use independent research “at least some of the time”;
  • 64 per cent of respondents are either very or somewhat concerned that liquidity could be negatively impacted by the explosive use of exchange-traded funds;
  • 42 per cent of those surveyed say public broker numbers are still “extremely relevant” in today’s market, while 48 per cent say they are “somewhat relevant.” Still, many institutional investors request that their brokers do not display their public broker number when they trade on their behalf, as many are worried about information leakage.

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