Nick Bayley is a managing director in the Compliance and Regulatory Consulting practice at Duff & Phelps. Prior to this, Nick was a Head of Department in the FCA's Markets Policy & International Division, FCA Senior Markets Adviser and was responsible for the UK regulator’s MiFID II Policy Project.
In the first of a series of monthly blogs throughout 2017, Nick will draw upon his expertise and share his views on the main challenges and opportunities that both sell-side and buy-side institutions need to be thinking about in relation to MiFID II. Without further ado, here is the first installment:
There is now less ten months until the second iteration of the Markets in Financial Instruments Directive, or MiFID II, comes in effect. It will see Europe’s regulators applying many of the same transparency, reporting and microstructure rules to non-equity markets as were introduced for equity markets under the first MiFID back in 2007, as well as strengthening investor protection and market resilience.
Since the New Year, my main observation in relation to MiFID II is very clear: people have now really woken up and it’s dawned on them that there is an awful lot to do to be ready for MiFID II coming into effect in January 2018.
When I left the FCA a little over a year ago, it is fair to say that generally only the big sell-side institutions, the trading venues and the trade associations had been properly engaged on this. The buy-side, broadly speaking, was still pretty passive.
In some respects, this is understandable. The legislation was only finalised in the summer of 2016 and the FCA had only put out one consultation paper at that time, mainly about markets issues. Buy-side institutions weren’t clear on precisely which rules they would need to follow and, perhaps not unreasonably, many chose to sit on the sidelines waiting for the FCA to clarify the situation.
Now, in 2017, MiFID II has become a reality for the buy-side. The FCA has issued a further three consultation papers since last summer and there is now no excuse; managers have to mobilise quickly now, particularly those MiFID investment firms that will be required to transaction report and perhaps also publish their trades for the first time.
Indeed, I hear that some investment firms are even deciding to become AIFMs, such is the level of concern over how onerous MiFID II transaction reporting seems to be.
There is a lot of MiFID II work that can be left until much later in the year but the advice I am giving to all our clients if firstly, to understand MiFID II’s impact on them and, secondly, to prioritise properly.
The lead time for system work and data work can be quite long, so buy-side firms need an impact analysis and a proper plan with an appropriate budget.
Firms should also think about starting discussions with their brokers; asking them about key issues like research and systematic internalisation.
Unsurprisingly, many buy-side firms will want to continue to pay for research using execution commission rather than hard dollars. But the new rules mean they will have to manage their receipt of and payment for research much more carefully than in the past. At the same time, the sell-side is looking at the research it produces and what price it intends to put on it. Several challenges, such as how to value fixed income research, which has not previously been paid for at all, remain.
The other key piece of advice I would offer to all firms, is to get buy-in from all their key stakeholders. MiFID II is absolutely not just a compliance challenge. This is a business challenge. Most compliance staff, especially in small and medium-sized buy-side firms, already have a full-time job just making sure they remain compliant with current rules. To simply dump MiFID II on them as well, in the assumption that this is just about regulatory compliance is wrong-headed.
So, mobilise all your key stakeholders, from the CEO, COO and CFO downward, and be prepared to spend some money on this. There are cost-effective solutions out there, but the important point is get the decision makers and budget holders on side now and really start to get to grips with the changes in MiFID II.
A structured approach is also absolutely necessary.
This is about as big and nasty as regulation ever gets. It represents, to my mind, the high watermark of European financial services regulation. Hopefully once we’ve got through MiFID II we’ll all be able to look back on it and think, ‘Thank goodness we should never have to do that again’.