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Desperately trying not to say "I told you so" - Matched Principal trading in Systematic Internalisers

Robin Poynder - Thursday, June 22, 2017

ESMA has just released a draft revision to the Delegated Regulation 2017/565 which deals with Systematic Internalisers (SI). The revision underlines that when a firm operates an SI it is not allowed to match trades in a de facto riskless back-to-back way. The proposed new Article reads:

(1) the following Article 16a is inserted: 

Article 16a 

Participation in matching arrangements 

An investment firm shall not be considered to be dealing on own account for the purposes of Article 4(1)(20) of Directive 2014/65/EU where that investment firm participates in matching arrangements with the objective or consequence of carrying out de facto riskless back-to-back transactions in a financial instrument outside a trading venue". 

(2) in Article 91, the second paragraph is replaced by the following: 

“It shall apply from 3 January 2018.”. 

The model where liquidity is sourced and passed off as own liquidity is looking increasingly precarious. The OTC principal-only model may find itself being pushed towards a hybrid model where there is also explicit commission based pricing.

MiFID Systematic Internaliser clarification

Robin Poynder - Monday, November 07, 2016

One of the logical headaches that we were wrestling with for some time has now been resolved (in theory), using the approach that we have been suggesting for some time.

ESMA put out a Q&A on Friday that explains how the underlying data that defines the EU wide volumes for various instruments will be collected during the first six months of 2018. Given that the Systematic Internaliser regime requires the measurement of thresholds against the previous six months of data, to understand whether a firm is obliged to operate trading for a given instrument under the SI regime, many have been wondering how to approach the initial period of MiFID operation. The period of data collection and explanation from ESMA clarifies this issue and allows for a delayed obligation of the SI regime until 1st September - although pointing out that a voluntary implementation may be appropriate for some firms to meet their wider trading obligations. 

One positive outcome of this implementation delay is that the market has a few more months to build their SI infrastructure. One challenge to keep an eye on is that the obligation to operate under the regime potentially hits a firm only one month after the data becomes available. 


MiFID II: Research unbundling

Robin Poynder - Monday, October 17, 2016

Reading through the recent consultation papers released by the AMF and the FCA, it is interesting how the two countries are approaching the Investor Protection area in general and specifically in this case; research unbundling. 

Any Asset Manager of size will be faced with a different framework/regime depending on which country they are operating in - and of course many operate in more than one country. At this stage they are both consultation papers so the final outcome is not yet set in stone, however the definitions are key. Starter for 10 - What exactly is substantive research? What is of non-material financial benefit? Corporate Access and wider services may be included within the Research budget - or not - depending on the Authority concerned. 

These conundrums are in addition to the underlying issue of how to establish an infrastructure that meshes CSAs with RPAs; that recognises the RPAs against the Budget and that recognises the value of received research to reflect back to the end investors. We have been very impressed with one particular firm that is building a new system from the ground up which promises to solve this set of challenges. Watching with interest... 

sharpen your pencils

Robin Poynder - Monday, October 03, 2016

A ramp-up in official missives this last week has perhaps served to focus the mind back on MiFID preparation after the diversions of summer madness. 

Both the AMF and FCA have issued CPs to gain some market feedback on their proposed approaches to parts of the investor protection area. Research unbundling is proving a headache and existing technologies don't provide an obvious solution to the funding workflows and value recognition. 

The PRA is looking at remuneration and looking for feedback on how this can add to the conduct controls.

Get the pens out and sharpen those pencils.  

MiFID preparation and understanding

Robin Poynder - Thursday, September 22, 2016

Attending a Webinar the other day it was concerning that the consultant who was presenting his views around necessary preparation for the onset of MiFID was still making assertions around the regulation that were two years out of date and factually incorrect. 

Whilst the details of establishing a MTF, OTF and Systematic Internaliser will probably never be seen as straightforward, the higher level approach of what the salient differences are between them should be well understood by now. If a firm were to listen to some of those old views they may be under the impression that they can somehow choose whether they wish to operate a OTF or a Systematic Internaliser as if they were somehow the same animal. That is without even beginning to get into the details of thresholds and how banks need to be aware that it is NOT going to be only the top 10 institutions who have to operate a SI. 

If one takes a dash of regional specialisation, adds a pinch of a forward curve non-standard dates that a client has requested and then stir this together with the SI rules around illiquid instruments - there will be a good few (meaning many) banks that cross the threshold for at least one instrument. Given that the period's grace for complying wth the SI regime is only 2 months, a firm really should be considering how to establish a SI now. Just ask your IT department how long it will take to develop that infrastructure (think: transparent and objective rules around client pricing, using same price for multiple client trades simultaneously, pre-trade transparency, different reporting rules and record keeping for starters) and they may well say something around 'non-trivial'... And if you haven't already encountered this phrase, it means 'a significant challenge'!

 Rules for MiFID preparation:
1. Engage with your legal advisors and get the up to date rules and interpretations
2. Appoint a specialist to manage your preparation, development and disparate teams (and this does not mean some spare body you have sitting around who seems to know a few buzz words around MiFID!)
3. Prioritise this development work above the 'nice-to-haves' - and be brutal in your choices to make sure this happens
4. Don't wait to start - if you are not already well into this programme, there is already a high risk of non-compliance come 2018!

Conduct Risk and the Global Code of Conduct

Robin Poynder - Wednesday, September 21, 2016

Speaking at the Profit and Loss conference in Copenhagen last week on a panel that focused on the new Global Code that is in draft, it was apparent that their is still a wide range of engagement from the financial community. 

Bear in mind that in the mind of the regulators this Code is designed to apply to ALL participants in the wholesale market - not only banks. The feeling in the room that questions and discussion suggested highlighted some key elements:

Non-banks are not yet engaged in this discussion, so work remains on the table here
- Whilst some banks have engaged in a gap 
analysis comparing where they would like to be with how teams operate currently, many have not yet achieved this understanding 
- The thorny issue of acting as agent or principal is generating significant conversation and even some confusion in the industry
- Last Look is developing all the time as a conversation around what is acceptable and what is not. This has not gone away!

There is the strongest sense that most participants would like a simple set of rules and wish to behave in the correct manner. The challenges arise in those areas of the industry where by their very nature, things are less than clear cut and discretion and/or decisions are required on an ad hoc basis. Legislating those areas (e.g. last look, agency vs principal and stop loss orders) out of existence would profoundly change the nature of how customers are able to transact and manage risk. Change is rarely comfortable!    

Best Execution RTS

Robin Poynder - Monday, June 13, 2016

The adoption of RTS relating to reporting of Best Ex should give warning of the far-reaching effect this will have on liquidity providers. Preparation for this obligation should be addressed sooner rather than later, given the array of elements that are impacted. 

1. The RTS look not only to organised trading venues such as MTFs and OTFs, but also Systematic Internalisers, market makers and other liquidity providers. (And as noted previously, many firms will be impacted by the SI regime given the threshold being applied to the single instrument level. Basically if the firm has any sort of USP in a given currency/instrument they may well be drawn into having to operate an SI)

2. Separate reports are required for different segments and different order books

3. The liquidity provider obligation applies whether or not part of a formal market making agreement. If you are holding yourself out as 'willing to deal on own account', that will do.

4. This seemed important enough to quote directly: "Likelihood of execution indicates the probability of execution of a particular type of order and is supported by details on trading volumes in a particular instrument or other characteristics of orders and transactions. Information on likelihood of execution should allow for the calculation of metrics such as the relative market size of a venue in a particular financial instrument or a class of financial instruments. Likelihood of execution should also be assessed with data on failed transactions or cancelled or modified orders." 

The wider set of expected details are set out in the RTS. Lets get to work!


Best Execution and Spot FX

Robin Poynder - Thursday, May 19, 2016

Those of you who follow our commentary will already know that we have been suggesting for a couple of years, that firms will be including Spot FX within their wider MiFID Best Ex construct. This is partly due to the 'best practice' element of Best Ex across all the other instruments that are covered by MiFID, but also due to the Senior Managers Regime which if investigating any subsequent wrong doing might raise an eyebrow (read have a serious issue) that a firm has chosen to not provide Best Execution for Spot FX. 

Two years ago conversations suggested that a couple of firms were preparing to include Spot FX under their Best Ex policies, whilst the wider market was not. Latterly it appears that many are now also alive to the idea of including Spot FX within this policy. 

Interestingly the FCA have recently provided an opinion that suggests at least some Spot FX would be expected to find inclusion with a Best Ex policy

At the recent FXJSC in April, it was noted that ancillary trades to a trade that is subject to MiFID are also to be part of MiFID, and therefore in the case of a MiFID trade requiring an ancillary Spot FX trade to be executed, the Spot FX trade is subject to MiFID - and thence Best Execution.

More grist to the mill ... 

MiFID Delegated Acts release!

Robin Poynder - Friday, April 08, 2016

In a surprise move the ESMA has released a partial set of the long awaited Delegated Acts for MiFID.

In particular the release addresses the area of Research Unbundling and how research accounts will work. 

The content is largely as expected and in line with how attendees of the Institutional Investor conference on the subject were discussing the challenges...

High level takeaways :

- Fixed Income is included (so those who were hoping for some kind of exemption, sorry but no).
- CSA's are not mentioned, however the underlying account structure could be used - but not the concept of applying funds against trading!
- Some exemptions exist for non-substantive desk notes and commissioned research on support of e.g. new issuance
- Funding of research is either by direct payments from own resources or via a Research Account. 
- Research Account is further defined. Can only be funded by a specific research charge to clients, based on a research budget set by the investment firm and with client approval for the charge. It cannot be linked to volume or value of other services. It cannot be used to fund internal research.  

Loads of challenge and innovative thinking coming up....



economics feedback please...

Robin Poynder - Monday, April 04, 2016

I am unsure of this and would appreciate some informed opinion on the EU situation right now in terms of stimulating the economy - and in particular the SME focus. We are seeing this as a specific element of MiFID prep, which is why this came into focus for me, however it appears that there is stimulus taking place right now. 

Am I reading this correctly? : 

The ECB issues TLTRO multi-year loans so that borrowing banks can lend to SMEs and it looks like these will soon be at negative interest rates. Does that mean the ECB will be providing capital and paying the banks to take it? hmmmm really?

It cant be that easy?  I might set up a bank!


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