UBS warns of MiFID II’s impact on profits

Swiss investment bank’s annual report outlines potential revenue impacts of MiFID II unbundling and changes to OTC derivatives trading.

UBS has warned MiFID II’s rules on unbundling and changes to over-the-counter (OTC) derivatives trading will reduce revenue potential for certain businesses.

The Swiss investment bank’s 2017 annual report, published this week, outlined that the ban on using commissions on transactions to compensate for research services, and a migration of OTC derivatives contracts to exchanges will hit profit margins.

“These market changes are likely to reduce the revenue potential of certain lines of business for market participants generally, and we may be adversely affected,” the report stated.

“For example, we expect that, as a rule, the shift of OTC derivatives trading to a central clearing model will tend to reduce profit margins in these products and the changes introduced by MiFID II may result in a reduction in commission rates and trading margins.”

UBS added that the new regulatory environment will also likely see a “material impact” on the platforms it currently uses, collateral management practices and further implementation costs as a result.

The investment bank said implementation and compliance with MiFID II has required significant investment and changes in operations, due to the scale and short time frame between finalisation of requirements and the effective date for certain rules.

The report also warned that margin requirements for non-cleared OTC derivatives has required substantial changes to collateral agreements with counterparties and clients’ operational processes.

With some jurisdictions still implementing the changes, UBS cautioned that the market could see dislocation, disruption of cross-border trading and concentration of counterparty trading.

The report added this also affects UBS’ ability to implement the required regulatory changes and could limit its ability to transact with clients.

“We continue to assess the effect on our businesses, in particular the requirement to price research and execution services separately, and whether these changes affect the timing of recognition of certain fee income,” UBS concluded.