With the 3 January 2018 MiFID II/R implementation date now only four months away, we continue to focus on the issues which concern our members in fixed income markets.

In these ICMA MiFID II/R monthly briefings, we are highlighting the main challenges of the legislation for primary and secondary markets, repo and collateral and asset management.

There will be an opportunity for members to discuss these challenges at a series of workshops on the practical implications of MIFID II/R for fixed income trading this autumn (see below for venues). These workshops are designed to assist buy-side and sell-side market participants in assessing whether they are on the right track. They will also facilitate discussions on local implementation challenges and interpretations as well as the sharing of information.

The workshops are designed for market practitioners and are focused on transparency, best execution and the research obligations of MiFID II/R, as well as the newly emerging trends in market structure. Panels will feature international and local experts from the buy side and sell side of the market.

MiFID II also has serious implications for markets beyond the European Union. Lunchtime briefings for ICMA members in Asia will give an overview of the main changes that MiFID II/R will bring to European fixed income market structure, followed by a discussion on the effects of MiFID II/R on Asian fixed income issuers, investors, banks and brokers.

You can register for these events via the ICMA website.  Members can also seek advice through our Legal & Regulatory helpdesk.

Martin Scheck
Chief Executive ICMA


ICMA Workshops: MiFID II/R - Practical implications for fixed income trading

Stockholm, 6 September
Brussels, 4 October
Luxembourg, 5 October
Paris, 6 October
Madrid, 19 October
Frankfurt, 26 October
Milan, 27 October

MiFID II - Practical implications for fixed income trading – summary note from the workshop held in London on 4 July 2017 and presentation on Transparency, Best Execution & Emerging Market Structure Trends

ICMA lunchtime briefings - MiFID II/R implications for Asian fixed income
Hong Kong, 28 August
Singapore, 31 August


MiFID II/R implementation in primary markets

Work within our primary market committees, with law firms and with the regulatory bodies has been continuing on the major MIFID II/R related issues which will impact market participants. These include product governance and PRIIPs regimes and allocation justification recording; inducements, costs and charges. Our primary market specialists are available to expand on any of the points.

Contact: ruari.ewing@icmagroup.org

MiFID II/R implementation in secondary markets

Implementation challenges
Market practitioners are at various stages of implementation regarding MiFID II's deadline of 3rd January 2018. The implementation challenges that are emerging in secondary markets fall into three categories; trading workflow and regional interpretations, governance and compliance and finally last but definitely not least, data. Specific examples follow:

I Trading workflow and regional interpretations
  • Differing post-trade deferral regimes across regulatory jurisdictions in the EU: With respect to large trades, or those in non-liquid securities, each jurisdiction can decide what trade information should be made public, and when, ranging from two days to four weeks after the trade. This creates a potential problem, since both liquidity providers and liquidity takers have a natural incentive to avoid information leakage following large trades, particularly in illiquid bonds, in order to protect themselves or each other from the risks of subsequent adverse market moves.
  • Breaking up the hybrid model of trading: MiFID II/R makes a clear distinction between risk-principal trading (true market making), which can be carried out by investment firms (most likely to be categorised as Systematic Internalisers), and riskless principal trading (or “matched principal” trading), which should be carried out by Organised Trading Facilities (OTFs).
II Governance and compliance
  • MiFID host governance over third country branches: Where a “host” MiFID firm is located within the EU, but has branches outside of the EU (such as a Singapore branch of a French bank), the branches are required to comply with MiFID II/R.
  • Information: Firms will require a substantial amount of pre-trade information before they can enter into a transaction.
III Data
  • An SI database: Buy-side firms will need to know which firms are authorised Systematic Internalisers (SIs). However, a centralised database is unlikely to be available.
  • FIRDS reference database matching for TOTV: All instruments Traded on a Trading Venue (TOTV) are required to submit reference data to ESMA’s Financial Instruments Reference Data System (FIRDS).
  • LEI for third country counterparties: To transact business under MIFID II/R, participants are required to have a Legal Identity Identifier (LEI).
Read more: Practical challenges of implementing MiFID II/R in secondary markets

Recent developments: ICMA, on behalf of the MiFID II Working Group, has requested clarification from ESMA on hedging and new issues (packages) in a scenario where an investment firm buys a new issue in the primary markets as the result of an allocation and hedges their investment by selling another bond (such as a sovereign bond) to the lead manager of the issuance, simultaneously with and contingent upon the investment in the new issue.

Contact: elizabeth.callaghan@icmagroup.org

MiFID II/R implementation in repo and collateral markets

The extent to which repos and other securities financing transactions (SFTs) are in scope of MiFID II/R requirements has been subject to some ambiguity. Many of the most critical issues have been clarified by now. Most importantly, it has been confirmed that pre- and post-trade transparency, most transaction reporting and some of the critical best execution requirements under RTS 27 will not apply to SFTs.

However, other MiFID II/R provisions, which do not explicitly exempt SFTs, would still appear to apply. This creates challenges. For instance, SFTs concluded with EU central banks will have to be reported under MiFIR, and thus separately from all other SFTs which are reported based on the SFTR framework. With regards to best execution, while ESMA has clarified that SFTs are not in scope of RTS 27, firms will still have to ensure compliance with the related requirements under RTS 28. There are also a number of further areas where it is not yet fully clear how MiFID II/R applies to SFTs, including record-keeping requirements and trade confirmations. ICMA continues to seek further clarity on these matters and will keep members informed through a dedicated webpage and regularly updated FAQs on MiFID II/R and Repo.     

Contact: andy.hill@icmagroup.org

MiFID II/R implementation of research unbundling for asset management

On research unbundling many are still expecting some final regulatory developments as plans are being finalised on how to comply with the unbundling provisions.
  • Treatment of US broker-dealers: US broker dealers face challenges in implementing the MiFID II research unbundling rules. Under current SEC rules, they cannot accept payment for research unless they register as investment advisers. The SEC is rumoured to be considering temporary relief, through a “no-action letter”, for US broker-dealers providing research to EU asset managers, while a more permanent solution is explored.
  • Implementing rules for FICC research: Both sell and buy-side industry participants are still hoping for further Q&A from ESMA about implementing the research unbundling rules for FICC research in particular, because of the lack of experience of pricing non-equities research. Our briefing about the currently available ESMA Q&A contains details about the Research Payment Account (RPA) structure, dealing with unrequested research, what counts as research and how to disclose research costs to end clients.
Recent developments - ICMA’s Asset Management and Investors’ Council (AMIC) has shared a note with the AMIC membership which summarises a number of industry surveys about research unbundling. AMIC is considering running a survey among ICMA’s buy-side membership of its own, focusing on FICC research, as few existing surveys have so far focused on this topic. AMIC is particularly interested in the intentions of members with regard to FICC research unbundling implementation, particularly where it differs from how they implement the requirements for equities research unbundling.

Contact: patrik.karlsson@icmagroup.org

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