09.25.2014
By Terry Flanagan

MiFID II Vexes European Buy Side 

Fund managers will to change their workflows to meet best execution requirements under new trading rules in the European Union.

Anthony Kirby, director and head of regulatory reform for capital markets and asset management at Ernst & Young said portfolio managers currently give their orders to the dealing team but will have to change their procedures to meet the best-execution requirements under the revised Markets in Financial Instruments Directive.

Kirby spoke on a panel on best execution at a conference hosted by the Financial Conduct Authority on 18 September 2014 which outlined changes in MiFID II that will impact investment firms.

“Under MiFID II will the front office be responsible for pre-trade checks and liquidity monitoring?” Kirby said. “How will post-trade costs such as clearing and settlement be integrated into the front office?”

In July the FCA released its review of of best execution and payment for order flow in the UK market which found that many firms do not understand key elements of the regulator’s requirements and are not embedding them into their business practices. The regulator said the factors that need to be considered when delivering best execution are price, costs, speed, likelihood of execution and settlement, size, nature or any other factor relevant to the execution of an order.

Christian Barltop, wholesale conduct policy, FCA said on the panel that there are significant technical challenges for the industry in providing standardised data to measure best execution across multiple asset classes in Europe’s fragmented market structure.

Barltop said: “Regulators are trying to find the ‘Goldilocks’ zone where new data requirements improve transparency and result in better outcomes for consumers while allowing firms to demonstrate consistent best execution.”

The regulator said MiFID II brings new reporting requirements for best execution – execution venues have to publish details on execution quality at least annually for individual financial instruments while investment firms have to report their top five execution venues each year and measure their quality.

Details such as the type of venue that has to provide reports, how to deal with illiquid instruments such as certain corporate bonds, and how to account for different market models and trading strategies will not be defined until the rules are released early next year. “The challenges are not small but they are not intractable,” said Barltop.

Kirby warned about the costs to the industry of having to collect the required data to measure best execution across multiple asset classes. “One big sell-side firm told me they were building eight separate data reporting companies to meet a number of new regulations which will cost them about $100m a year,” he said.

Katy Hyams, regulatory legal counsel at the LME said on the panel said venues could provide the data that regulators ask for but the challenge lies in ensuring that the data meets their required purpose. She suggested that the European regulator could provide an overall framework but give national authorities the flexibility to implement the rules based on their specialist knowledge.

“MiFID II is based on the equities market and works well for homogenised securities where the same instrument can be traded on a number of venues,” Hyams added. “For complex products such as commodities the data provided could be meaningless.”

Featured image via Orlando Florin Rosu/Dollar Photo Club

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