MiFID II combined with greater sensitivity on costs has accelerated the shift towards fee-based advisory models and has generated more attention on exchange traded funds (ETFs), according to Stephen Cohen, head of iShares EMEA at BlackRock.
The introduction of the second iteration of the Markets in Financial Instruments Directive (MiFID II) on 3 January this year encouraged greater transparency and meant that clear indications on liquidity levels in ETFs became more readily available.
Six months on, and Cohen believes that with the post-trade transparency, assumptions around trading volumes have “met expectations to the benefit and comfort of investors.”
BlackRock noted that now that ETF trades are required to be reported, Euronext estimates the annual visible trading volume this year is USD2.3tr versus USD1.3tr last year.
It added that between January and June this year, on average 61% more trading on the iShares UCITs range was visible – where it would not have been before MiFID came into force – and for fixed income this jumps to 74%.
“We may only be six months in but MiFID II is driving awareness about ETFs as a way to invest across asset classes and geographies by shining a light on costs, and mandating trade reporting,” added Cohen. “This will drive the next phase of growth in the European ETF industry.”
He added that MiFID II was also playing a part in the continuing upheavals within the wealth management sector, accelerating change as much as the current focus on costs and value.
“It is accelerating fee-based wealth advisory models, where the advisor is paid by the investor and not the product, which opens up the advisory market to using ETFs as an efficient investment tool to deliver client outcomes.”
According to Cohen, one particular market where MiFID II has had an impact is Italy where he said his company has seen a significant increase in the number of conversations with distributors wanting to know more about building ETF-based portfolios.
“In addition we are seeing a consistent growth in the launch of wrapped products built with ETFs in the form of discretionary mandates and unit-linked products,” he said.
A further effect of MiFID II is the increase of market makers within the European ETF space. “Market makers are an essential part of the ETF ecosystem,” says Cohen. “The more market makers in a trading ecosystem the easier it is for ETF investors to transact or in other words the more liquid the ETF market.
Cohen says that in Europe, there are 25% more registered market makers since MiFID II came into force. “This is in part due to new obligations MIFID II imposed on liquidity providers to register with exchanges as market makers, in the context of ongoing growth expectations in ETF trading activity on European exchanges.”
The debate regarding transparency in ETFs has been the subject of a short series of articles within the past three weeks written by Hector McNeil, co-founder and co-chief executive at ETF white label provider HANetf. His concluding column has been published this week.
He argues that when it comes to active ETFs and non-transparency, the issue of disclosure needs to be addressed.
“The effect of MiFID II and Authorised Participants (APs) has been to provide regulators with far more data so they can analyse and catch any entities that are engaging in market abusive behaviour,” he writes this week.
“APs receive confidential information regularly and have strong internal controls and processes to deal with such information.”
McNeil suggests redefining the role of the AP for non-transparent ETFs to include acting as a market maker. “This would then allow APs to avail of the market making exemption within MiFID,” he suggests “This solution also allows issuers to control the flow of information by limiting its availability to essential trading counterparties.”
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