Buy-side Perspectives Issue 14 | Page 34

EFAMA’s perspective on need-to-know regulations for buy-side heads of trading As the dust is settling from the implementation of MiFID II since the beginning of 2018, K&KGC has captured both remaining and new regulatory challenges that are need-to-know areas for the buy-side heads of trading at the Alpha Trader Forum roadshow meetings in London, Paris, Frankfurt and Stockholm this autumn. We caught up with Vincent Dessard, Senior Regulatory Policy Advisor at EFAMA for further comments to our findings. ESMA’s central facility in relation to instrument reference and trading data. Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA) made an interesting statement in his speech on 3rd October 2018 on the “The state of implementation of MIFID II and preparing for Brexit” about ESMA’s preparation of a central facility for instrument reference and trading data. Considering the long standing and intense debate about consolidated tape in Europe, would you please elaborate about what you know about this initiative and to what extent it may benefit the buy-side trading community? Vincent Dessard: First and foremost, thank you for allowing me to contribute with EFAMA’s perspectives in issue 14 of your excellent magazine. The Consolidated Tape (CT) has been on EFAMA’s wish list since the inception of drafting MiFID II. The key benefit of a CT is to facilitate a “golden source of data”. We could early on identify the benefits of a publicly mandated, single solution deployed across all asset classes. However, no multinational authority previously volunteered to take on that kind of role. The authorities also needed to offer the opportunity for multiple commercial providers of CT to promote market stability and competition. ESMA has now confirmed the start of their CT development. While we would welcome a multi-asset solution with real-time tape, the starting point will be delayed tape for cash equities. Another development area I would like to propose for the future, to enhance and centralise the transparency of markets would be if the CT could also include trade reporting data for derivatives, securities financing transactions (SFT) and movements on bonds that are on an international central securities depository (ICSD). This would be useful to centralise even if not all instruments are reported in real-time. I see clear benefits for the buy side with more centrally governed data supporting an improved price formation on the market. CSDR preparations for the buy-side trading desk by September 2020 K&KGC have flagged this upcoming regulatory requirement to heads of trading and recommended that they analyse the root causes for failed settlements within their firm to prepare accordingly. We think the review should be done from multiple perspectives looking at types of asset classes and trades as well as analysis by counterparty. Settlement will likely have an increased importance in formal counterparty reviews in the future. 34 Vincent Dessard: I fully share your view that ‘settlement’ will be at the heart of the upcoming development for multiple reasons. The CSDR settlement discipline proposes penalties, which will be a major change and additional pressure on market participants to settle their transactions. The regulatory aspect of the buy-in regime is what concerns me the most. Specifically, the fact that the failing counterparty may be imposed to pay for all costs endured by its counterparty in OTC trading. I would recommend that buy-side firm’s traders and middle office are appropriately trained and counterparty contracts are adjusted in order to adapt to mandatory settlement lead-times. We would recommend that MiFID II investment firms set aside efforts to analyse their settlement flows, especially around securities borrowing, recall time as well as fail recovery mechanisms. Buy-in procedures might become extremely costly, especially for OTC trades (which is frequent for large or less liquid trades). RTS28 reporting changes for 2019 The buy side and vendors have all reported that the RTS28 and RTS27 reporting initiatives in 2018 have, as yet, not resulted in any added value for their decision making. What changes would the buy side need to adapt in their 2019 RTS28 reporting? Vincent Dessard: This question would benefit from answers from multiple angles. From a buy-side perspective, I would agree that the benefits of the RTS27/28 reports are not yet visible. Consolidated tape will better serve the buy-side’s objectives. From a regulator’s standpoint, the benefits of the RTS27/28 are more obvious. These reports were primarily developed for their benefit. The regulators are currently spending a lot of time analysing and compiling the new types of data. You can for example already find more detailed ESMA analysis in their report on the use of derivatives. From my perspective, the ongoing effort by the authorities will allow for much quicker and more surgical fixes” when the next crisis will turn up. Systematic Internaliser regime for fixed income. In contrast to the previous heated equities trading discussions, the fixed income buy-side traders have not raised any concerns about the impending systematic internaliser regime for fixed income. What are your perspectives about this subject? If it happens, will it be business as usual? Winter 2018