Conference Dailys TRADETech FX Daily 2018 | Page 25

THETRADETECHFX DA I LY
T
he implementation of MiFID II this year was
not widely expected to cause immediate
tidal waves, particularly as the introduction
of some aspects has been staggered to allow
participants to fully adjust to the new trading
environment, but it cannot be said that the
in-depth
flagging them as SI or over the counter (OTC)
transactions?”
“The key point is understanding how much
volume is price forming as I believe the numbers
reported on SI trading have in fact been vastly
exaggerated in terms of what is truly address-
a better position going forward, according to
HSBC Global Asset Management (HSBC GAM)
managing director, global head market structure
& execution strategy, Ian Cohen.
“HSBC Global Asset Management has op-
erated itemised Research budgets for many
“In some ways, the fun is coming back into the business because up until now,
resources across the board have been so focused on preparing for MiFID II.”
BRIAN SCHWIEGER, GLOBAL HEAD OF EQUITIES, LONDON STOCK EXCHANGE
industry has not responded to the task over the
last six months.
Indeed, a variety of new terms have entered
the trading lexicon and look set to stick around
for some time to come as a direct result of Mi-
FID II, meaning firms on all sides of the market
spectrum deal with what has become the ‘new
normal’ for trading.
“We are beginning to get to a point where
market participants are looking at new innova-
tions and ways of trading,” says Brian Schwieg-
er, global head of equities at London Stock
Exchange. “In some ways, the fun is coming
back into the business because up until now, re-
sources across the board have been so focused
on preparing for MiFID II.”
While volumes have so far largely favoured
periodic auctions and systematic internalisers,
in place of the lit exchanges favoured by the
European Securities Market Authority (ESMA),
equities market participants are now adjusting
to the new environment and there has yet to be
a significant dearth in liquidity.
However, despite a relatively successful imple-
mentation of the new regulations in January and
the necessary adjustment by trading behaviours
to the new framework, it is too early to say the
regulation has been a complete success consid-
ering it was only been in force for six months.
“If a key objective was to move liquidity back
into lit exchanges, at this early stage, it is ques-
tionable that that this goal has been achieved
with much trading simply shifting to system-
atic internalisers and periodic auctions,” says
Charlotte Decuyper, European market structure
analyst at Liquidnet.
Big changes
The introduction of SIs in place of broker-cross-
ing networks (BCNs) was of the most signifi-
cant points of contention within the regime,
particularly around how these trades are being
reported and ensuring that SIs fall under the
tick size regime.
“With the bulk of SI trading going through
SIs at banks and brokers, there has been some
differing views about how transactions should
be reported,” says Mark Hemsley, president
of Cboe Europe. “Some are reporting their
operational trades, and the question is, are they
able liquidity. The SIs and regulators are working
out between them how to address those nuanc-
es and resolve some of those reporting issues,
which I think will happen p retty soon.”
The issue of enforcing the tick size regime
on SIs was one of the major early issues facing
ESMA following the implementation of MiFID II,
and after an industry consultation in February
that drew conflicting opinions from participants,
the regulator announced it would go ahead with
its plan, stating in late March: “ESMA also does
not fully subscribe to the arguments brought
forward by some stakeholders that, in conse-
quence of the proposed amendment of RTS 1,
trading venues would be subject to a lighter
regime than SIs.”
Strain on relationships
While there were changes made around best
execution and trade reporting, both elements
that continue to throw curveballs at compliance
teams across the industry, the unbundling of
research payments and execution fees has the
arguably been the biggest shift to deal with for
both the buy- and sell-side to handle, according
to Northern Trust senior vice president, Glenn
Poulter.
Much was made of whether buy-side firms
would pass the new fees of paying for research
on to investors or absorb those costs into their
own P&L, but asset managers largely fell into
line with the latter option, while the sell-side
have had to consider how they price research,
with conflicts between those two objectives
having a significant impact on the relationship
between the two groups, Poulter says.
“There was a real stand-off between the
buy-side and the sell-side, and realistically that
debate hasn’t really changed,” he says. “We
have only now had two quarters where research
payments are starting to come through, for the
sell-side firms to start thinking about what the
long-term implications on revenues generated
from research versus their cost base. It’s not
going to be until the end of this year that we
are going to have a real handle on the overall
impact.”
While the changing research relationships
continue to play out, larger firms that have the
resources to manage the issue should be in
years, and thus the process and mechanics for
operating detailed budgets was not new to us.
However, the changers to how research is pro-
vided, consumed and paid for were and continue
to be significant,” he says.
Blinkers off
While so much of the industry’s attention has
been fixated on MiFID II for the last few years
there has clearly been a tremendous amount
of effort put into preparations and ongoing
compliance, but market participants must be
wary not to put all of their regulatory eggs into
the MiFID II basket.
“MiFID II did not exist in isolation, and required
any changes be made in parallel with changes
for other regulatory and commercial needs,”
says HSBC GAM’s Cohen. “The fact that the in-
dustry as a whole was able to introduce MiFID II
without any major issues is to be commended.”
As such, it’s worth taking a step back to take
a wider view of the numerous forces at work in
the markets according to LSE’s Schwieger: “I
would encourage the market, being six months
into the new regulatory regime, to start taking
off their ‘MiFID II blinkers’,” he says.
“It will of course continue to have a significant
impact, but MiFID II is not the only influence on
the market at the moment; there is the Capital
Requirements Regulation (CRR), Central Securi-
ties Depositories Regulation (CSDR), Securities
Financing Transactions Regulation (SFTR) and
the relaxing of the Volker rules to also consider.”
While there has been plenty of introspection
as to how the new regime has bedded in so
far, it would be unwise not to consider how the
regulation will evolve going forward. There are
already signs from ESMA that alterations may
be made in the near future, with chair Steven
Maijoor recently highlighting that SIs and peri-
odic auctions will be given a close inspection.
As Cohen puts it, “MiFID II did not end on 3 Jan-
uary 2018”, and there is still work ahead, even for
those firms that believed themselves ready for
the implementation date at the start of the year.
“Market infrastructure models have evolved
and will continue to evolve and recalibrate as
further changes are introduced,” he says. “Mar-
ket regulators will also quite correctly refine and
improve the regulatory framework.”
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