MiFID II: a year on
26 Jan 2019
As MiFID II celebrates its first birthday, how has the industry adapted to the changes, and what challenges is it still facing?
Image: Shutterstock
Just before its 3 January 2018 implementation date, less than half of attendees of the Global Custody Forum felt they would be compliant with the second Markets in Financial Instruments Directive (MiFID II) in time for the deadline.
MiFID II regulates firms that provide any services to clients linked to financial instruments and venues where these instruments are traded.
Firms prepared for the implementation of the initiative throughout 2017 and adapted their business models throughout 2018—this will no doubt continue as we move into 2019.
Peter Moss, CEO of SmartStream Reference Data Utility, says: “Last year, was a year of settling down the regulations, the processes and the data quality for the market as a whole.”
He adds: “The European Securities and Markets Authority (ESMA) is continuing to look at the quality of the data being published and where necessary they will make changes or push participants to align to ensure the regulator’s goals of market transparency are achieved.”
Back in 2017 and throughout 2018, many industry participants raised concerns about the scope of the changes and the uncertainty surrounding the directive, with many suggesting it had been the biggest challenge of the year.
As Chris Turnbull, co-founder of Electronic Research Interchange, surmises: “With the MiFID II regulation now reaching its first birthday, it is interesting to look back at a year that many thought would bring substantial change for the asset management industry.”
He adds: “In hindsight, it may have been naïve to expect quick-fire change from an industry that has operated in a certain way for decades. The overwhelming majority of firms were unprepared for the changes last January, and the state of confusion continued throughout the year.”
As Volker Lainer, vice president of product management at GoldenSource, mirrors: “The regulatory technical standards were continually changing as late as Q3 last year. As such, banks, brokers and fund managers alike were backed into a corner and had no choice but to adopt sticking plaster solutions.”
This was felt just a month before the implementation date when ESMA delayed the enforcement of the legal entity identifier (LEI) requirements by six months to July 2018. MiFID II requires all legal entities involved in a trade to include their LEIs in European trade reporting. The six months adjustment period was introduced since not all firms succeeded in obtaining LEIs in time for the January deadline.
Similar to the LEI delay, firms had to make other amends to their existing systems and processes based on the varying feedback they received from local regulators. In addition, banks and asset managers had to centralise and check their data thoroughly—many are still in the process of achieving this.
As Moss indicates: “The biggest challenges were the inconsistencies between how standards were applied by various participants. ESMA definitions differed from Association of National Numbering Agencies (ANNA) definitions and market participants contributing data all had mixed interpretations.”
Brian Charlick, risk and regulation, financial services at CGI affirms that another challenge was remaining compliant with the General Data Protection Regulation.
Charlick highlights: “Trader details are required and only the reported fields were to be consumed and stored as an audit trail is essential. To get around this, the client had to ensure each of the traders and clients provided authorisation for the client to use and maintain the relevant data for regulatory and auditory purposes.”
Other members of the industry were concerned about reference data. David Farmery, vice president of message automation at Broadridge, suggests: “The biggest challenge was around reference data needed to determine whether instruments were reportable or not.”
He adds: “There was significant uncertainty very close to go live date around how the regulations and the market infrastructure would work, particularly around trading on a trading venue (ToTV).”
“This resulted in market infrastructure providers such as approved publication arrangement withdrawing eligibility services very late in the day.”
And as Ben Duckworth, head of business development at Simplitium, mirrors: “Reference data has been the biggest challenge for us and our clients. The ToTV instrument universe was a problem in Q1 and Q2 but has significantly improved. However, a gap that remained was the systematic identifier (SI) status of market participants. Understanding the SI status of your counterparty for each instrument traded is a critical requirement for accurate reporting, however, no mechanism is defined in the MiFID II framework to make this data available.”
Are we still not ready?
Although the implementation date was on 3 January last year, the industry has still been working on the regulation with post-implementation work.
As Farmery explains: “Ahead of the MiFID go live, regulators were strongly suggesting banks should keep their project teams intact for a good six months post go live. This has proven to be wise advice.”
A recent survey, released in December last year and conducted by Cappitech, found almost 30 percent of those asked said they are only “fairly confident or not confident at all” in keeping up with MiFID II changes.
More than half said they were not ready, or not reporting correctly when MiFID II first went live in January.
The survey, entitled ‘MiFID II and best execution: headache or opportunity’, asked approximately 100 capital markets firms to assess the extent to which they had been affected by the new directive.
To help solve this, 50 percent of respondents said they plan to employ a dedicated member of staff to manage their regulatory reporting.
A further 45 percent of respondents said transaction reporting was the most challenging element of the MiFID II ruling, while 29 percent said they found best execution reporting and monitoring accounts a challenge.
Another report from the International Capital Market Association (ICMA), said European bond markets are still waiting to experience the benefits of MiFID II and Markets in Financial Instruments Regulation (MiFIR).
The report highlighted that while the European bond markets continue to function, MiFID II/MiFIR is yet to deliver on its objectives of improved investor protection, greater transparency, and a more competitive landscape.
One of the main objectives of MiFID II/MiFIR was to encourage more trading on regulated venues rather than in the over-the-counter (OTC) market, and there is evidence that this has been the case, ICMA noted.
However, ICMA suggested that the liquidity and market functioning appear to have been maintained in the wake of regulation despite ongoing issues. These issues are particularly related to the transparency regime and the accessibility and quality of pre- and post-trade data.
While it is accepted that this will improve over time, the implementation of MiFID II/MiFIR seems to have missed an opportunity to provide a utility based consolidated tape for fixed income, ICMA revealed.
Unbundling
A new study conducted by Plato Partnership in December last year found research unbundling is already going global—53 percent of buy-side respondents have already implemented a global policy and a further 20 percent will do so within the next five years.
“In Europe, the change may be regulatory driven, but across the rest of the world it is being led by end investor demand”, Plato Partnership said.
Rebecca Healey, head of Europe, the Middle East and Africa market structure and strategy at Liquidnet, says: “It isn’t surprising that unbundling is a global phenomenon just one year after the implementation of MiFID II.”
She further indicates: “Across the world, there has been a growing demand from end-investors to be assured that they are getting value for money, and a need for greater transparency is a direct consequence of this. Ability to track research providers, the type of research they provide and at what cost unlock possibilities that weren’t previously available, all leads to increased value for end-investors.”
However, Turnbull says a year on from MiFID II unbundling, there’s still slow progress and a long way to go.
He says: “[After the MiFID II implementation], asset managers were expected to become more transparent and reveal both their research costs and how they are paying for them. But many pre-MiFID II behaviours, such as deciding on the value of research after consuming it, have not changed.”
“It is easy to see this as a disappointment and ultimately a signal of MiFID II’s struggles, but things are starting to move in the right direction.”
Looking to the future
Commenting on the industry’s seeming lack of confidence in some areas, Cappitech concluded: “Keeping abreast of changes in regulation takes skill, time and resources. Not everyone feels confident to take on this task.”
As Moss affirms: “Complying with regulations is an ongoing process. Since the 3 January, ESMA has implemented a range of additional MiFID requirements on a regular basis, this included the double volume cap, the no LEI, no trade rule, the SI mandatory regime for equities and fixed income. In March 2019, this will be extended to incorporate OTC derivatives. At SmartStream we have continued servicing our clients with the ongoing implementations with each of these ESMA deadlines. MiFID II was ambitious in the scope and detail of the definitions that it imposed on the market; other regulators have learned from this approach and are revisiting some of the regulations, for example, such as Dodd-Frank in the US.”
As Matt Smith, CEO of SteelEye, affirms: “If the Financial Conduct Authority delivers on what it promised, to begin crackdown on non-compliance in 2019, then we will likely see a domino effect of firms taking action to comply—and as a result, a more transparent, competitive and efficient industry should emerge.”
“Hopefully, once clarification is provided and regulation requirements are gradually met, the entire market infrastructure and those who participate in it will be more in control and stronger than ever before.”
To improve meeting deadline targets for implementation dates, Christian Voigt at Fidessa, says: “If MiFID II teaches us anything it is that we shouldn’t have such large regulations in the first place.”
“Instead of consulting and negotiating for ten years on texts exceeding 1.7 million paragraphs, how about lawmakers work on a steady stream of smaller changes.”
“Faster time to market, better impact assessment, lower implementation costs, reduced risks, the benefits for everyone could be tremendous.”
MiFID II regulates firms that provide any services to clients linked to financial instruments and venues where these instruments are traded.
Firms prepared for the implementation of the initiative throughout 2017 and adapted their business models throughout 2018—this will no doubt continue as we move into 2019.
Peter Moss, CEO of SmartStream Reference Data Utility, says: “Last year, was a year of settling down the regulations, the processes and the data quality for the market as a whole.”
He adds: “The European Securities and Markets Authority (ESMA) is continuing to look at the quality of the data being published and where necessary they will make changes or push participants to align to ensure the regulator’s goals of market transparency are achieved.”
Back in 2017 and throughout 2018, many industry participants raised concerns about the scope of the changes and the uncertainty surrounding the directive, with many suggesting it had been the biggest challenge of the year.
As Chris Turnbull, co-founder of Electronic Research Interchange, surmises: “With the MiFID II regulation now reaching its first birthday, it is interesting to look back at a year that many thought would bring substantial change for the asset management industry.”
He adds: “In hindsight, it may have been naïve to expect quick-fire change from an industry that has operated in a certain way for decades. The overwhelming majority of firms were unprepared for the changes last January, and the state of confusion continued throughout the year.”
As Volker Lainer, vice president of product management at GoldenSource, mirrors: “The regulatory technical standards were continually changing as late as Q3 last year. As such, banks, brokers and fund managers alike were backed into a corner and had no choice but to adopt sticking plaster solutions.”
This was felt just a month before the implementation date when ESMA delayed the enforcement of the legal entity identifier (LEI) requirements by six months to July 2018. MiFID II requires all legal entities involved in a trade to include their LEIs in European trade reporting. The six months adjustment period was introduced since not all firms succeeded in obtaining LEIs in time for the January deadline.
Similar to the LEI delay, firms had to make other amends to their existing systems and processes based on the varying feedback they received from local regulators. In addition, banks and asset managers had to centralise and check their data thoroughly—many are still in the process of achieving this.
As Moss indicates: “The biggest challenges were the inconsistencies between how standards were applied by various participants. ESMA definitions differed from Association of National Numbering Agencies (ANNA) definitions and market participants contributing data all had mixed interpretations.”
Brian Charlick, risk and regulation, financial services at CGI affirms that another challenge was remaining compliant with the General Data Protection Regulation.
Charlick highlights: “Trader details are required and only the reported fields were to be consumed and stored as an audit trail is essential. To get around this, the client had to ensure each of the traders and clients provided authorisation for the client to use and maintain the relevant data for regulatory and auditory purposes.”
Other members of the industry were concerned about reference data. David Farmery, vice president of message automation at Broadridge, suggests: “The biggest challenge was around reference data needed to determine whether instruments were reportable or not.”
He adds: “There was significant uncertainty very close to go live date around how the regulations and the market infrastructure would work, particularly around trading on a trading venue (ToTV).”
“This resulted in market infrastructure providers such as approved publication arrangement withdrawing eligibility services very late in the day.”
And as Ben Duckworth, head of business development at Simplitium, mirrors: “Reference data has been the biggest challenge for us and our clients. The ToTV instrument universe was a problem in Q1 and Q2 but has significantly improved. However, a gap that remained was the systematic identifier (SI) status of market participants. Understanding the SI status of your counterparty for each instrument traded is a critical requirement for accurate reporting, however, no mechanism is defined in the MiFID II framework to make this data available.”
Are we still not ready?
Although the implementation date was on 3 January last year, the industry has still been working on the regulation with post-implementation work.
As Farmery explains: “Ahead of the MiFID go live, regulators were strongly suggesting banks should keep their project teams intact for a good six months post go live. This has proven to be wise advice.”
A recent survey, released in December last year and conducted by Cappitech, found almost 30 percent of those asked said they are only “fairly confident or not confident at all” in keeping up with MiFID II changes.
More than half said they were not ready, or not reporting correctly when MiFID II first went live in January.
The survey, entitled ‘MiFID II and best execution: headache or opportunity’, asked approximately 100 capital markets firms to assess the extent to which they had been affected by the new directive.
To help solve this, 50 percent of respondents said they plan to employ a dedicated member of staff to manage their regulatory reporting.
A further 45 percent of respondents said transaction reporting was the most challenging element of the MiFID II ruling, while 29 percent said they found best execution reporting and monitoring accounts a challenge.
Another report from the International Capital Market Association (ICMA), said European bond markets are still waiting to experience the benefits of MiFID II and Markets in Financial Instruments Regulation (MiFIR).
The report highlighted that while the European bond markets continue to function, MiFID II/MiFIR is yet to deliver on its objectives of improved investor protection, greater transparency, and a more competitive landscape.
One of the main objectives of MiFID II/MiFIR was to encourage more trading on regulated venues rather than in the over-the-counter (OTC) market, and there is evidence that this has been the case, ICMA noted.
However, ICMA suggested that the liquidity and market functioning appear to have been maintained in the wake of regulation despite ongoing issues. These issues are particularly related to the transparency regime and the accessibility and quality of pre- and post-trade data.
While it is accepted that this will improve over time, the implementation of MiFID II/MiFIR seems to have missed an opportunity to provide a utility based consolidated tape for fixed income, ICMA revealed.
Unbundling
A new study conducted by Plato Partnership in December last year found research unbundling is already going global—53 percent of buy-side respondents have already implemented a global policy and a further 20 percent will do so within the next five years.
“In Europe, the change may be regulatory driven, but across the rest of the world it is being led by end investor demand”, Plato Partnership said.
Rebecca Healey, head of Europe, the Middle East and Africa market structure and strategy at Liquidnet, says: “It isn’t surprising that unbundling is a global phenomenon just one year after the implementation of MiFID II.”
She further indicates: “Across the world, there has been a growing demand from end-investors to be assured that they are getting value for money, and a need for greater transparency is a direct consequence of this. Ability to track research providers, the type of research they provide and at what cost unlock possibilities that weren’t previously available, all leads to increased value for end-investors.”
However, Turnbull says a year on from MiFID II unbundling, there’s still slow progress and a long way to go.
He says: “[After the MiFID II implementation], asset managers were expected to become more transparent and reveal both their research costs and how they are paying for them. But many pre-MiFID II behaviours, such as deciding on the value of research after consuming it, have not changed.”
“It is easy to see this as a disappointment and ultimately a signal of MiFID II’s struggles, but things are starting to move in the right direction.”
Looking to the future
Commenting on the industry’s seeming lack of confidence in some areas, Cappitech concluded: “Keeping abreast of changes in regulation takes skill, time and resources. Not everyone feels confident to take on this task.”
As Moss affirms: “Complying with regulations is an ongoing process. Since the 3 January, ESMA has implemented a range of additional MiFID requirements on a regular basis, this included the double volume cap, the no LEI, no trade rule, the SI mandatory regime for equities and fixed income. In March 2019, this will be extended to incorporate OTC derivatives. At SmartStream we have continued servicing our clients with the ongoing implementations with each of these ESMA deadlines. MiFID II was ambitious in the scope and detail of the definitions that it imposed on the market; other regulators have learned from this approach and are revisiting some of the regulations, for example, such as Dodd-Frank in the US.”
As Matt Smith, CEO of SteelEye, affirms: “If the Financial Conduct Authority delivers on what it promised, to begin crackdown on non-compliance in 2019, then we will likely see a domino effect of firms taking action to comply—and as a result, a more transparent, competitive and efficient industry should emerge.”
“Hopefully, once clarification is provided and regulation requirements are gradually met, the entire market infrastructure and those who participate in it will be more in control and stronger than ever before.”
To improve meeting deadline targets for implementation dates, Christian Voigt at Fidessa, says: “If MiFID II teaches us anything it is that we shouldn’t have such large regulations in the first place.”
“Instead of consulting and negotiating for ten years on texts exceeding 1.7 million paragraphs, how about lawmakers work on a steady stream of smaller changes.”
“Faster time to market, better impact assessment, lower implementation costs, reduced risks, the benefits for everyone could be tremendous.”
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