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The Hurdles and need for MiFid II Regulations

Traders Magazine Online News, December 18, 2017

Jason Morris

A main driver for the recently announced MiFID II compliance rules was European Regulators saw unfairness  in the practice of asset managers using “soft dollars” in their fees for research purposes. Managers were charging their commissions, and within those fees were some funds that were earmarked for research.  The issue at hand is this allocation of commissions is not typically transparent to the investors, and regulators desired for this to be an out-of-pocket costs instead of functioning as an inefficient “toll.” With MiFID II, portfolio managers will not be able to utilize soft dollars for investment research from brokers unless it’s paid directly, or they work out an agreement with clients to pre-fund the research costs.  Investment managers could be incentivized to choose less efficient execution costs in order to build a research fund. They likely have the client’s best interests in mind, and might be able to access quality analyst information, but the lack of transparency into this process is troubling for regulators.

Another aspect of the MiFID II requirements is an expansion of “best execution” rules that will require managers to share the top execution venues they use for various instrument types (e.g. equities, listed options, futures, etc.).  Thus, firms will need to better monitor execution quality, which will require further reporting capabilities. The regulations will also introduce more pre-trade transparency requirements to non-equity trades, which will be another compliance obligation for managers.

The intent of MiFID II is to require transparency into asset management firms’ trading practices for investors, improve best execution, and promote more orderly trading behavior within markets. Although it’s a regulation affecting European-based managers, it also impacts any asset managers with a presence in those markets.  There are also reporting impacts for firms trading European securities.  So for firms that have subsidiaries, trade securities, or trade with clients under European jurisdiction, they’ll need to adjust to MiFID II accordingly. Companies that only trade within a single country are few and far between in today’s interconnected asset management world, so most firms will be impacted in some way with MiFID II, and accordingly they will need to look closer at their infrastructure.

The Reporting Hurdle

The biggest challenge for companies affected by MiFID II is meeting the regulatory demands with their reporting.  The reporting demands cover the trade level, individual fill level, and across asset classes. Thus, Ffirms need to accumulate and maintain a considerable amount of data in a certain way to meet the regulations, and this requires technology that’s up to the task.  Unfortunately, many asset management companies are utilizing legacy systems that make this granular reporting difficult if not impossible. Thus managers are now itemizing the requirements to make sure they even capture the appropriate data points AND have that data readily available.  This is also a catalyst for many firms to revisit their infrastructure decisions..

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