MiFID II might be a huge headache for investment banks, but the actual impact on revenues over the next two years after the regulation hits on the 3 January 2018 could be less of a tidal wave sweeping over the industry and more of a light splash in the face.
New projections from research firm Coalition suggest that revenues within investment banks in Europe could decline by just 2.6% over the course of the next 24 months. “Cash equities divisions, particularly equity research, will be hit by MiFID II, but that decline will account for just a 0.4% reduction in overall revenues at investment banks in Europe,” says Eric Lee, research and analytics director at Coalition. “Banks’ bottom lines will be more hit by the decline in fixed income revenues, but again this is just 1% of total revenues.”
Ranks of research analysts across investment banks have been badly depleted over the past few years, and it could get worse after MiFID II hits. Estimates by Mckinsey say that banks are likely to cut their research budgets by another 30% in the not too distant future. Coalition suggests that revenues related to research could decline by 20% over the 12-24 months after MiFID II in January, and that cash equities revenues will be down by 15%. But the overall impact will be minimal.
“Our view is to try and temper the doom around MiFID II,” says Li. “No one knows what the new normal will be in the post-MiFID II world, but there are other things that will affect banks’ bottom lines. If we assume the Bank of England will raise interest rates twice over the next two years, or that monetary policy will start to normalise – all of this will inject volatility into the markets and help offset the impact of MiFID II. At the end of the day, a 2.6% decline is not that significant.”
Maybe so, sales and trading staff should not assume it’s business as usual after January. As we’ve pointed to before, the issue is incredibly complex and not just about eliminating jobs based on revenue figures, but changing the whole skills and knowledge base of those who survive. For example, sales traders who survive need to understand the new market structure, the new mechanics of the system and the routing requirements. “People on the sell-side will need to educate people on the buy-side in how to route trades and how to make the best use of all the venues available, Richard Johnson, an expert on market structure at Greenwich Associates told us previously. “Are you going to use a dark pool? Which systematic internalizer is best for this trade? The buy-side is asking for help with this from client-facing folks at the brokerages.”
“MiFID II is incredibly complex, but our point is that it’s not just about cash equities or the impact on flow credit trading revenues,” adds Li. “It affects most areas of trading and its impact will feed through into advisory revenues. But we also don’t believe doomsday analysis.”
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