About a year ago, the head of equities business development at a firm in London likened MiFID II to “British people suddenly deciding to drive on the right side of the road” in terms of the potential implications.
That’s a lot. Has it really been that bad? What are the implications on traders and asset managers?
The market may be getting more transparent
More than half of investment-grade corporate cash bond trading volume is now conducted electronically in Europe, topping the 19 percent of electronic volume in the US. That shift is ultimately expected to make markets more transparent (a positive thing), but corporate bonds might see a reduction in liquidity at the same time (less than ideal).
Want an overview? Check out: Your Straightforward Guide to MiFID II
The other aspect of an increasingly transparent market is that tech -- specifically advanced tech -- has to play a bigger role. It can’t be an issue of “lowest cost” for trading desks and firms anymore; it has to be “best value.” This applies to the actual workflow of trading, but also the compliance aspects put into place with MiFID II. (Admittedly the compliance side is much more what our company deals with.)
Day-to-day the biggest changes haven’t been felt yet, though
Consider a recent quick poll from a MiFID II check-in event among fund managers:
The majority in this group are in the “OK” or “too early to tell” buckets, although admittedly that 6% number on the far right is troubling.
Compliance was on the mind of the attendees of this check-in, though:
“Day to day there has been a lot of system checking to make sure they are working as expected,” said Neil Bond, head of trading at Ardevora Asset Management. “There are extra fields we are getting now so we need to make sure brokers are populating them correctly, the data is feeding through efficiently and it is being reported properly. I can’t imagine that process has gone smoothly for anyone because we have heard that the test environments were available very late.”
The chief executive of the Financial Conduct Authority (FCA), Andrew Bailey, said the effects of MiFID II will only play out in full over a period of time, and that there was still more to do on implementation, particularly on reporting.
“A key challenge for firms in implementation was the expanded transaction reporting requirements,” he said. “These involved a step change in both the volume and quality of data we receive regarding transactions taking place in the market.”
It’s estimated that on the data front, MiFID II will record about 35M transactions per day. Before its introduction, that number was about 20M. The two necessary elements of all that increased data for asset managers are:
- Learn from it and make better business decisions (paramount)
- Make sure you are compliant in maintaining it (also crucial)
The “big five”
These are five concepts crucial to keep in mind regarding working with MiFID as an asset manager:
- Record Keeping – capture records in context. Preserve in an easy to view format.
- Investor Protection – act honestly and fairly. Ability to demonstrate what happened.
- Supervision – develop policies and procedures particularly in relation to communication irrespective of channel.
- Reconstruction – must be able to supply regulators with communications regarding specific “trades” irrespective of platform. Preserve context in an easy to view format.
- Retention and Storage – records available to clients for 5 years and 7 to regulators.
If you keep these in mind, the implications for trading shouldn’t be massive. And remember, overall MiFID II is a great thing, enabling increased resilience productivity and efficiency, and more importantly increased protection of the security of the business.
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