The revised Markets in Financial Instruments Directive coming into force in January 2018 is expected to hit corporate and investment banking revenues in Europe, the Middle East and Africa, but the impact will be manageable, according to Eric Li, research director at Coalition.
As a result of MiFID II, revenues of corporate and investment banking products in the EMEA region are expected to fall by some 2.6% from currently around $170 billion within the next 12 to 24 months, Coalition said in a Dec. 6 report on the directive's impact. Around 80% of the decline is being attributed to banking and fixed income, currencies and commodities products, according to the report.
Banking, which accounts for 65% of total CIB revenues in the EMEA region, will account for almost half of the decline, with a share of 1.1 percentage points. FICC products, with a 23% share of total CIB revenues, are expected to account for 1 percentage point of the total revenue drop, Coalition estimated.
Although cash equities will be hit hardest, with around 15% of revenues expected to disappear within two years, such products will have only a marginal impact on the total decline, with a share of just 0.4 percentage point.
A key reason why banking products will drive much of the total revenue decline stems from the decision made by most asset managers to absorb MiFID II research costs rather than pass them on to clients, Li said in an interview Dec. 7. As asset managers try to limit the blow to their profit margins, they will seek to recover some of the research costs by getting better pricing from services providers, including investment banks.
Many companies unaffected
Although MiFID II will provide some challenges to EMEA investment banks, other market factors such as central bank policy, interest rates or volatility may prove far more significant to CIB revenue growth over the next two years, Li noted.
"Even if all of our forecast assumptions were to materialize, the MiFID II impact is manageable, " he said.
Despite the wide range of reactions from different parts of the financial services industry, the 2.6% decline is not very big, Li said, adding that this was one of the reasons Coalition published the report — to show that the industry can weather the change.
Coalition found that only around 20% of all CIB activities in the EMEA region will suffer a significant impact — that is, 5% to 20% revenue loss within two years — as a result of MiFID II. Some 44% of the industry will face no impact from the new directive.
As a EU directive, MiFID II affects all kinds of trading in financial instruments with the bloc, which has raised questions about the implications for companies with global operations. The European Commission said Dec. 6 that it has recognized certain trading venues authorized by the U.S. Commodity Futures Trading Commission as eligible for compliance with EU trading obligation for derivatives in order to ensure that EU counterparties can trade certain instruments, such as interest rate swaps and index-based credit default swaps, on authorized designated contract markets and swap execution facilities in the U.S.
Coalition is owned by CRISIL. S&P Global Market Intelligence and CRISIL are owned by S&P Global Inc.