Industry’s efforts to implement MiFID2 pay off – although work remains
By Adam Jacobs-Dean, Director, Global Head of Markets Regulation, AIMA
Published: 13 March 2018
The go-live date of MiFID2 has been and gone and it’s clear already that the market has managed to adapt to the new regime without major disruption. That is a reflection, ultimately, of the enormous level of resources that firms devoted to their implementation work in 2017 – as well as the significant ongoing compliance resource that they are devoting to the regime.
But two months in, it’s also clear that there are aspects of the regime that haven’t fully bedded in. 2018 will see the go-live of additional aspects of the regime, as well as a gradual shift in firms’ approaches.
The standout challenge is on the reporting front – noting that this is an aspect of MiFID2 that doesn’t extend to AIFMs. While T+1 transaction reporting to regulators seems to be operating reasonably well (notwithstanding the FCA’s concerns that firms are still getting basic fields like price and volume wrong), post-trade reporting to the market for non-equity instruments is proving more of a challenge.
The number of reports being made is overall very low for the buy-side – most firms are finding that in most situations they can execute on venue or with a systematic internaliser, which gets them off the hook when it comes to reporting. But in situations where the buy-side firm is the reporting party, the brutally short deferral windows for publication make it hard to put in place a workflow that guarantees timely and accurate reports. The providers of the reporting plumbing work – APAs – are themselves struggling with the scale of the challenge.
Other than reporting, rules on payment for research and other third-party inducements continue to occupy a significant amount of time for managers. Firstly, there’s the challenge of policing the material that you receive to ensure that you are not unwittingly breaching the rules. Then there is the difficulty of deciding whether material is “research” as defined in the rules – it’s not just a case of relying on how the material is labelled, unfortunately. For compliance officers, the goal is an internal framework that is as straightforward to apply as possible, something that is a challenge given the way the rules are drafted. When it comes to research, though, the impact of MiFID2 rules has not been as painful as we might have originally feared – the challenge to brokers’ established pricing models seems to be prompting a better focus on clients’ needs.
Sticking with the inducements rules, the treatment of gifts and entertainment has also rapidly advanced up the agenda as firms seek to balance the need to comply with the rules with maintaining important ways of interacting with brokers and other third-party vendors. We’ve seen a spread of approaches on the part of members and the approach that a firm follows in this space needs to reflect the specificities of that firm’s business. As with research, the onus is ultimately on the investment manager – rather than the provider of the service – to get things right.
At this stage, we’re also looking ahead to aspects of MiFID2 that haven’t yet gone live, the most obvious requirement being annual public reporting on best execution (first reports are due in April 2018 for the 2017 calendar year). It’s evident that most firms will not have been able to collect data for 2017 exactly as expected – either it wasn’t available or supervisors were not consistent in their expectations of how that data should be processed. The first round of reports will definitely be a learning process and regulators recognise this.
A question that crops up often is: which parts of MiFID2 will the FCA be focusing on in its supervision? Its 2018 business plan will shed more light, but some of the FCA’s recent statements suggest that reporting, payment for research, and best execution will all be in the spotlight. Algo controls have already been scrutinised, so follow-up work on this topic is also likely.
Hence the work on MiFID2 continues. One firm mentioned to me that their MiFID2 project resourcing has been kept in place until mid-2018 to make sure they are properly on top of the new regime. AIMA continues to support firms’ efforts through education, peer discussion and engagement with regulators, so please get in touch if there is any way we can help.
This article first appeared in HFMWeek.