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Seeking Clarity on MiFID II Inducement Trading Rules

Traders Magazine Online News, January 17, 2018

Ivy Schmerken

With MIFID II’s rules on inducements now a reality, buy-side firms are paying close attention to the costs associated with their front-office trading platforms and analytics.

The EU regulation, which took effect on Jan. 3, could draw scrutiny to execution services and tools that are sponsored by brokers, such as order management and execution management systems as well as trade analytics.

“In order to align with MiFID II’s inducement regulations, the buy side has an obligation to understand what a third party is paying for and what is being paid for on their behalf,” said Spencer Mindlin, analyst at Aite Group on a recent webinar. 

While MiFID II has been focusing on unbundling research payments from executions, there is a lot of ambiguity around the industry practice of brokers paying for vendor-sponsored buy-side client connectivity (i.e., FIX lines) and how that is going to align with MiFID II inducement regulations, said Mindlin on the webinar.

For example, some buy-side firms may be receiving an EMS free-of-charge from their sell-side firms, which are sponsoring the third-party systems by paying the vendors a fee for connectivity. Thus, brokers could be utilizing part of their trading commissions to compensate third-party vendors, on their behalf.

Under MiFID II, an investment firm providing portfolio management or investment advice to clients cannot accept anything free from the sell-side if it could be considered an inducement to trade.

“All in all, MiFID II will require a higher level of compliance from the buy-side than it is used to, especially concerning investment research and the topic of inducement,” according to RegTech in “The new MiFID world: research from the buy-side perspective.”

Article 24 (8) of MiFID II prohibits investment managers accepting “fees, commissions or any monetary or non-monetary benefits paid or provided by any third party,” summarized RegTech. “In principle, this reform will still allow investment firms to receive research from third parties, but greatly limits its scope in order for the action to not contravene inducement rules.”

Though an EMS is not specifically mentioned in MiFID II, it’s possible that the receipt of an EMS on a free-of-charge basis could be considered “a non-monetary benefit” under MiFID II.

FCA Offers Clarification on MiFID II & Inducements

policy statement from the UK’s Financial Conduct Authority released in July 2017, sheds some light on these MiFID II implementation issues.

“We take the view that certain activities can be considered as inherent to the provision of execution services and received by the underlying client in return for execution costs and charges,” stated the FCA’s PS17/14.

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