Welcome back. Things have certainly been busy for us this year on the MiFID II front, as we race to put clients in the best position to prepare for the looming Jan. 3, 2018 compliance date. The FCA last week published its near-final MiFID II rules, and the industry is firing away on all engines. At this point, if you haven’t started preparing, you might be looking at five years’ worth of work to squeeze into the remaining nine months.
So what are the big-ticket outstanding items on firms’ to-do lists? I recently joined a panel of experts from State Street Global Advisors, HSBC Securities Services and SIX Financial Information during a Financial News webinar. Here are just some of the issues that figured prominently:
Unbundling is still at the top of the list.
Now that the options are clear, firms are diving in deep to understand what research they are consuming, working out how to value it, and deciding whether to pay for it out of their own P&L, or through enhanced commission sharing agreements. In fixed income in particular, firms are starting to review, value, rank and vote on the research they receive to understand how much of what they buy is substantive. Make no mistake: the new unbundling rules present a fundamental change in how the buy-side consumes research and execution globally. If you haven’t already, start thinking about how you can centralize your research processes and practices to take on this challenge.
Transaction & Trade Reporting
We’ve spoken extensively about some steps you can take to tackle the monumental task of transaction reporting. Before you get to any of that, though, determine whether you’re a MiFID firm, an AIFM or UCITS manager.
You’re only on the hook for both trade and transaction reporting if you’re a MiFID firm, but non-MiFID firms should still pay attention as the FCA has stated there’ll be another review that could rope you in some time after the implementation of MiFID II. At the very least, you should start looking at data capture.
If you are in-scope for transaction reporting, you should be speaking to your systems vendors already. We, for one, have a big project aimed at capturing additional data fields and building interfaces to ARMs, and are already working with many clients to help them get ready. The other side of the equation to keep in mind is your interfaces with the Approved Reporting Mechanisms (ARMs). Don’t assume that your transaction reports will go through the ARM and on to the regulator without any issues. ARMs in many cases have already built their GUIs to manage the large number of expected rejections and run business analytics to show you how clean the data is. So you’ll need to be in a position to clean the data as it gets sent back from the ARMs. This is something that will simply take the industry time to improve throughout 2018.
Another sticky subject that came up on the panel was the issue of Legal Entity Identifiers. Come Jan. 3, 2018, firms subject to MiFID II transaction reporting obligations will not be able to execute trades on behalf of clients that should have Legal Entity Identifiers, but haven’t gotten around to getting one. What does that mean to you? You need to make sure your counterparties and clients that need LEIs get them in place, or you won’t be able to do business. Unfortunately, nearly all panel participants acknowledged the market is somewhat behind in getting this process underway. Make sure you’re not among those lagging.
This bit’s critical. If you haven’t started analysing your transaction costs, talk to a TCA provider now. Once you get your historical data, analyse it and identify ways you can improve. If you’re systematically underperforming a benchmark in a particular trade, you should be able to have a good explanation for regulators. Then, systematise how you’re going to find, review and address possible changes for such issues going forward. One of the best things you can do is identify and document where you have not satisfied best execution and implement a policy change that you can show a regulator. And don’t forget – you need to review your brokers’ best execution and order routing policies. Good luck.
Somewhat related to this are the issues of what happens to order routing, and how much volume will be driven to crossing networks. My colleagues on the panel believe more trades will be going to the crossing networks. I hold the optimistic view that this is yet another opportunity for innovation, as the double-volume caps drive the market to come up with better ways to trade large blocks. It’s going to be critically important to have connectivity to such venues. We are in the process of expanding our access network as well; stay tuned.
We’ll be doing a few more check-ins on MiFID progress as we count down to deadline.
If you’re in North America, I’ll be running a webinar on issues affecting North American funds on Thursday, April 13. You can register here.
If you’re attending TradeTech Paris on April 25-26 at the Palais des Congrès de Paris, I hope to see you there.
Until then, feel free to check out our MiFID resources, and please reach out if you have any questions. If you’d like to receive updates on our MiFID events, please add your name to the distribution list. And don’t forget to subscribe to the blog if you haven’t already.