Compliance and Regulatory Consulting
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MiFID II will drive fundamental changes in the EU securities markets across the full lifecycle of products and services. With major implementation efforts required and the (proposed) application date of 3 January 2018 looming, hedge fund managers should take action now. Here we describe some of the key MiFID II issues that managers will need to address to ensure a successful implementation.
Key MiFID II Issues
Although completely separate payment for research will not be mandatory, the use of execution commission to pay for research will be the subject of much tighter regulation and governance. Importantly, this will also apply in fixed income markets.
Firms will no longer be able to rely upon their brokers to report their executions under MiFID II. They will either be responsible for reporting themselves or take advantage of a much narrower exemption if they only transmit orders to MiFID investment firms.
More detail is required in execution policies with greater granularity in the number of instrument classes covered. Policies are to be annually reviewed. Firms executing orders will need to publish annually their top five execution venues by instrument class. Trading venues will provide much more information on execution quality than previously.
The MiFID II rules for controlling electronic trading build on ESMA’s existing High-Frequency Trading (HFT) guidelines and introduce new organizational and governance requirements. Firms using Direct Electronic Access (DEA) will need to provide more information to their DEA providers including their ‘types of strategies’, ‘historical trading pattern’ and details on their pre- and post-trade controls. Firms providing DEA have to ensure their clients’ comply with MiFID II.
Firms will need to record and retain their telephone calls and electronic communications for five years. Discretionary investment managers have previously benefitted from a proportionality carve out (‘the duplication exemption’) because their sell-side counterparties are recording the calls. This exemption is likely to fall away, in order to assist the FCA with its market abuse investigations.
Firms trading commodity derivatives will need to provide daily reports of their positions (including economically equivalent OTC positions) when trading outside a trading venue. In addition, competent authorities can limit the size of positions.
All multi-lateral execution systems, both equity and non-equity, including all voice and hybrid systems, will have to be regulated as RMs, MTFs or OTFs.
Fixed income and derivative markets will be the subject of far great transparency on both a pre- and post-trade basis.
How Duff & Phelps Can Help
Duff & Phelps is an award-winning global provider of compliance and regulatory consulting services to the financial services industry. Clients consult our team of specialists at every stage of their business lifecycle to meet regulatory obligations and navigate the rapidly changing regulatory landscape. Our multidisciplinary team is drawn from leading financial institutions, regulators, government authorities, legal and advisory firms.
Based in key financial centers, we are closely connected with regulators and industry associations so that our clients have the best available information on regulatory requirements and trends. We operate seamlessly across borders to provide clients with cross-jurisdictional advice and integrated expertise.
With deep expertise in MiFID II requirements and implementation programs, we are uniquely placed to assist your firm overcome MiFID II challenges and seize the opportunities presented by this far-reaching regulation.
We can assist you with a broad range of challenges including: