London Singapore Brussels Paris

Today New City Initiative is comprised of 43 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.

« Back to News

MiFID II: A delay is not an excuse for complacency

Published by Charles Gubert

The proposed one year delay by the European Commission (EC) to the Markets in Financial Instruments Directive II (MiFID II) is a welcome relief at asset managers. The European Securities and Markets Authority (ESMA) had reportedly written to the EC recommending a delay amid widespread concerns that financial institutions would be unable to undertake the necessary IT infrastructure reforms to implement MiFID II.

The UK’s Financial Conduct Authority (FCA) had hinted there could be delays amid uncertainty over the final proposals while industry associations and market participants had all called for a postponement. However, recent reports suggest that senior Members of European Parliament (MEPs) have said they will not renegotiate any aspects of MiFID II.

The original implementation date of January 3, 2017 was ambitious. While Regulatory Technical Standards (RTS) were published in September 2015 outlining proposals surrounding commodity derivative position limits, algorithmic trading and pre and post-trade transparency, any definitive announcement on the proposed ban on utilising equity commissions to pay for sell-side research had yet to be forthcoming. The ban on using equity commissions to pay for research is an emotive topic among policymakers and regulators, although an announcement is expected before year-end.

The challenges for fund managers around prohibiting the use of equity commissions to pay for sell-side research are well-documented. However, some of the pre and post-trade transparency obligations are going to require huge investment by fund managers too, either through building the technology infrastructure internally, or by outsourcing some of the reporting in a manner not too dissimilar to how they managed their derivative reporting under the European Market Infrastructure Regulation (EMIR).

Pre and post-trade transparency will require firms to report details of any orders or transactions conducted on a trading venue such as a regulated market (RM), multilateral trading facility (MTF) or organised trading facility (OTF). Post-trade data, including information on positions in commodity derivatives, must be supplied to regulators as well.  This will include data points such as pricing, timing of transactions and volumes. This will require significant changes to fund managers’ and other MiFID regulated firms’ operations.

Transaction reporting will also apply to any financial instrument traded on a trading venue. It will include any financial instrument where the underlying is a financial instrument traded on a trading venue, or where the underlying is an index or basket of financial instruments traded on a trading venue.

Again, highly forensic information about the client, trader or algorithmic formula responsible for the trade is to be included in transaction reports which must be made through the trading venue where the transaction occurred or via an Approved Reporting Mechanism (ARM). While there were concerns that there could be overlap with EMIR derivative reporting, regulators have said if derivative reports supplied to a trade repository contain the same data, there is no obligation to report again.

There is no doubt that regulators in the run-up to 2008 lacked the pre-requisite information to properly identify build-ups in systemic risk. While there is an obvious merit to reporting much of this information, the risk regulators now face is that they are receiving far too much data to properly digest it all. Should another crisis or major fraud occur, regulators could face a torrent of criticism for failing to prevent such an event from occurring despite possessing all of the information.

The delay has fortunately given fund managers time to organise their systems and service provider relationships to ensure they can report in good time. A delay will also mean there is a reduced risk of a last minute panic to build reporting systems, something which would undoubtedly lead to errors and mistakes creeping in.

However, this delay should not be viewed by asset managers as an excuse for complacency. The implications of MiFID II are enormous, and its impact is going to be far more significant than previous rules such as the Alternative Investment Fund Managers Directive (AIFMD).  As such, firms should focus on MiFID II implementation and work to attain compliance as soon as possible.