Tackling the Challenges of MiFID II: Wrap Up

This is the final in the webinar series, Tackling the Challenges of MiFID II, hosted in October 2017 by Matt Gibbs of Linedata and featuring a panel of industry experts:

Andrew Glessing    Chris Gizmunt       Mark Rubin     Michael Sparkes      Philippe Carre
Alpha Consulting     Linedata                GloComm                 ITG                       Ullink

Previous discussions throughout 2016 and 2017, highlighted the revised Markets in Financial Instruments Directive, widely known as MiFID II, commission management, best execution and reporting .

 

Count Down to MiFID II – Experts Panel Discussion

 

Where are the most significant challenges remaining?

“The reality is this is all about disclosure”

Lack of clarity is a fact of our hugely complex financial world beyond MiFID II, even with its broad agenda. The step up in technology required to force greater transparency, disclosure and reporting simply highlights this. Moreover, lack of clarity around MiFID II has given most participants pause about what they must deliver, in addition to increasing risk and cost now and beyond January 2018. In terms of understanding MiFID II principles, firms are mostly aligned, but detailed procedures, TCA and reporting are not because the dependencies are so great. Moreover, testing is just getting underway.

However, what has also been apparent through the MiFID II journey of the last year and more is the resilience of the market- the industry will “crack on”. The process has clearly produced an acknowledgement by asset managers and vendors alike that their technology must continue to evolve to increase efficiencies and MiFID compels this. Advancing from equities only with MiFID I to the facilities required for multi-asset with MiFID II, for example, requires a significant step up.

“European regulation with global effect not consistently explained”

Managers outside Europe are challenged by what they see as a European regulation the global effects of which are not yet consistently or clearly explained. There is a variance between what the FCA is saying versus the SEC, for example. Up to now the literature has been about “what to do as a non-EU entity” which is not comprehensive globally. Very little has come out from the SEC explaining, for example, whether an EU asset manager can pay a US firm for research.

 

How has MiFID II changed technology?

“Billions have been spent that will not be recouped, but there are many positive technology outcomes.”

From a systems perspective as well, it’s hard to see a clear picture. We at Linedata are fine-tuning our trade and transaction reporting solutions; but the lack of clarity from a buy-side perspective seems to stem from “what can or can’t be reported on my behalf?” If you do figure out what can’t be outsourced, then comes the challenge of identifying the required data points and sourcing that data. ISINs are a good example. Previously there hasn’t been a need to populate the OMS database with ISIN data.  For those reporting obligations that can be outsourced, there is risk of behavioral changes by a buy-side trader. For example, now a trader might choose a counterparty reporting on his/her firm’s behalf when otherwise he/she might have chosen a different counterparty.

It’s true that billions have been spent that will not be recouped, but there are many positive technology outcomes – periodic auctions as an example. Furthermore, with TCA and post-trade analytics, you can’t just check the box; you must use the data in a proactive way to inform your processes going forward. If this really sticks, it will have been a true positive effect of MiFID II.

 

Trading changes?

“It’s not just about more technology; it’s about implementing automation for better data capture and analysis.”

Today it’s a completely different trading market structure than post MiFID I. This has triggered a lot of behavioral changes, for example the unbundling of RPA, that is bringing bring more liquidity and transparent trading, as with new periodic optioning. Expect more changes to dark pools. People are adopting and adapting, to support future changes which they can already see around the corner. Especially on the sell side, it’s not just about more technology; it’s about implementing automation for better data capture and analysis. Regulatory changes have moved the needle on implementing tech change.

Commission transparency is a good thing. However, regional differences continue to exist as far as how investment research should be funded. Larger companies can insource or fund from their own P&L but smaller firms look at passing the costs directly to clients via RPA / CSAs. Ongoing buy- and sell-side conversations will be interesting as this entire area continues to evolve.

Greater understanding of market structure, how dollars are spent not just around price discovery and transparency but as to the industry broadly will be a positive outcome. The fixed income revolution and the electronification of other asset classes is having an enormous impact.

Where will we be a year into MiFID II?

First, it needs to be said that there are many MiFID II dedicated resources that can now be reallocated to growth. There are still changes that need to be addressed -middle and back office changes, the essence of capital market plumbing and middle office clearing. Evolution will be on-going as the FCA continues to tweak things that are not going as expected. Firms will still be asking “am I ready?” but it will no longer be a 3-year pain process, and evolving changes will be implemented more quickly. For the equity markets, there will be no big bang, with a smooth transition on-going. Transparency requirements will increasingly put pressure on liquidity and could cause market gridlock. We are just at the beginning of a decade of change in the fixed Income markets. Fundamental market data will be more plentiful and cheaper in a year and on-going. Brexit will then be at the center of everyone’s thinking and will result in a divergence of regulations, priorities and resources.

We’ll be looking at a more unsettled market for the consumption of research. In Fintech there may be more disruptors, and a less comprehensive landscape with more best of breed vendors. The buyside will benefit from more aggressive pricing and more Fintech innovation in reaction to things done less than perfectly in 2017.

Finally, what will regulators’ risk appetite be in various jurisdictions? Certainly there will be a fine or 2 levied by the FCA. Firms will need a well-run MiFID II compliance program – those who don’t have forbearance will be fined. The FCA’s best execution review is still alive and kicking and ultimately, non-compliance is not an option.

To learn more about Linedata’s MiFID II solutions, please contact us.

 

 

 

 

Matt Gibbs Vice President, Product Management | Linedata

Download the PDF or watch the webinar replay