20 December 2017
This will be the last update from ICMA on MIFID II/R before the implementation date of 3 January 2018. We have made substantial efforts to engage with our membership in Europe and beyond on the process, and have seen almost 1,000 market participants at workshops throughout the autumn. It is evident that even at this late stage some challenges remain, and we have highlighted them in this update.
ICMA will support its members through this process with events and calls next year. Members can also seek advice through our Legal & Regulatory Helpdesk. More information on implementation issues for primary markets, secondary markets, repo and collateral, and asset management is on our website or please contact our specialists directly.
ICMA Chief Executive
Legal Entity Identifiers (LEI) remain a key priority not only for transactions between EU investment firms and third country firms outside the EU (impacting the ability to trade globally, with all clients) but also within the EU/EEA (impacting the ability to trade within the EU/EEA). On 20 December, ESMA issued a statement on LEI implementation under MiFID II/R (see below).
ESMA’s Level 3 guidance poses an implementation challenge to market participants as 3 January is fast approaching, leaving little time to make necessary adjustments in response to the latest clarifications.
Market participants are waiting for ESMA to publish a list of “comparable” trading venues outside the EU. This has implications for trade reporting obligations. Trades executed on a non-comparable trading venue are deemed OTC trades and have to be reported by the EU counterparty. In contrast, transactions executed on comparable non-EU venues are not subject to trade reporting by the EU counterparty.
Third party dependencies will have an impact on markets due to the inter-reliant nature of current market structure partners such as trading venues, Approved Publication Arrangements (APAs), Approved Reporting Mechanisms (ARMs), Order Management System (OMS) providers, and trading enabling software vendors. Delays from these market structure partners create the potential for missed deadlines for buy-side and sell-side market participants.
Key risks post 3 January
- The non-harmonised approach of post-trade deferrals across Europe may have a potential negative impact on liquidity. This may result in a bifurcation of liquidity between jurisdictions having adopted a short deferral period (48 hours) and jurisdictions opting for the maximum deferral (of 4 weeks [Supplementary Deferral Regime]). There is also concern that so few countries have published their deferral regimes. Firms need certainty. The likelihood is that firms will trade with counterparties where the deferral regime is known.
- The lack of a centralised register for Systematic Internalisers (SIs) per instrument and per LEI is likely to result in buy-side firms having a problem in accurately identifying SIs by instrument and legal entity. We will be monitoring the situation post-implementation to see what happens in practice.
- System readiness is a potential source of risk. There is concern regarding APAs and ARMS; there may be a technical glitch due to the fact they could struggle with the volume of trade and transaction reporting in January.
- As a result of unbundling fixed income research, small asset managers may not be able to pay for research, which may be one of the leading catalysts for an increase in consolidation in the market for small asset managers. In addition, due to a reduction in research staff, a very real possibility is that coverage for small corporates will decrease substantially in the near term. This warrants further investigation and monitoring to see what actually transpires.
- There is concern regarding third-country status and the conflict with privacy laws in some countries. Some market participants in third-countries are unable or unwilling to provide the personal details required for transaction reporting by EU trading venues governed by MiFID II. As a result, trading venues (the operators of MiFID II MTFs and OTFs) have introduced an innovative solution involving third-country firms transacting with EU counterparties on non-EU trading venues (see diagram below). This workflow may potentially solve this matter for third-countries. However, there remains the personal data challenge (not wanting to release) for third-country firms who transact with EU counterparties on EU trading venues. The full extent of extraterritoriality and personal data is as yet unknown and will be closely observed in the coming months.
MiFID II/R implementation in secondary markets
Overview of MiFID II/R deferral regimes in EU Member States
On 15 December, ESMA published a table compiling the supplementary deferral regimes applicable in different Member States for trading in non-equity instruments under MiFIR.
Under Article 11 of MiFIR, national competent authorities (NCAs) are empowered to grant operators of trading venues a publication deferral of the details of transactions that meet either of the following characteristics: Large in Scale (LIS), deemed illiquid, or above the Size-Specific-To-Instrument (SSTI) threshold. In conjunction with a publication deferral, NCAs may grant a “supplementary deferral” which means that the level of granularity may vary ie by:
(a) requiring the publication of additional information during the standard time period of deferral;
(b) allowing the omission of the publication of the volume of transactions for a time period of 4 weeks;
(c) allowing the aggregation of transactions for a time period of 4 weeks (non-equity instruments other than sovereign debt);
(d) allowing the aggregation of transactions for an indefinite period of time (sovereign debt instruments);
(e) allowing the combination of (b) and (d) for sovereign debt instruments.
Based on voluntary contributions by NCAs, the list provides an overview of the current status of implementation of the applicable MiFIR deferred publication regime per type of instruments in Belgium, Denmark, France, Germany, Italy, Malta, the Netherlands, Portugal, Spain, Sweden and the UK.
Revised opinion providing guidance related to third-country trading venues for post-trade transparency
On 15 December, ESMA issued a revised opinion on post-trade transparency requirements in relation to third-country trading venues. It stated that "in order to contribute to the smooth implementation of MiFID II/MiFIR as of 3 January 2018 and to maintain a level playing field between third-country trading venues, transactions [executed by EU investment firms] on third-country trading venues should not be required to be made post-trade transparent under Articles 20 and 21 of MiFIR", pending the publication of ESMA’s assessment of third-country trading venues.
In a previous opinion published on 31 May, ESMA specified that, subject to third-country trading venues meeting a set of criteria, EU investment firms trading on those trading venues were not required to make transactions public in the EU via an Approved Publication Arrangement (APA). ESMA has since been asked to conduct assessments of more than 200 third-country trading venues. The results are expected to be published in the course of 2018 according to ESMA.
ESMA liquidity assessments of individual bonds for trade reporting
ESMA published on 6 December the MiFID II/R transitional transparency calculations (TTC) for bond and equity instruments (excluding Exchange Traded Commodities and Exchange Traded Notes). In total, 566 bonds or 0.9% out of 61,761 fixed income instruments have been classed as liquid according to the MiFIR criteria. In other words, 99.1% of bonds will be eligible for pre-trade transparency waivers and post-trade publication deferrals.
The calculations are subject to future amendments by ESMA if deemed necessary and will be applicable from 3 January 2018 until 15 May 2018. Latest updates of the FAQ document issued by ESMA in relation to the TTCs can be found here.
Legal Entity Identifier (LEI) requirements
The “Legal Entity Identifier” is a mandatory requirement under MiFID II/R and remains a key priority in view of the implementation. ESMA reiterated the importance of LEIs (“No LEI, no trade”) following the publication of a Briefing on the LEI in October. On 20 December, ESMA issued a statement on LEI implementation under MiFID II/R.
As highlighted in our MiFID II September Members Update, non-EU firms that do not have an LEI by 3 January 2018 may find that EU counterparties are unable to transact with them, or that they are unable to transact on EU trading venues.
Similarly, issuers of securities that are traded on EU venues (Regulated Markets, Multilateral Trading Facilities, Organised Trading Facilities, and Systematic Internalisers) will need to provide an LEI.
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MiFID II/R implementation in repo and collateral markets
In its updated Q&A on MiFID II/MiFIR investor protection and intermediaries (November 2017), ESMA confirmed that SFTs are inside the scope of the MiFID II order record keeping requirements, as outlined in Article 16(6) of the Regulation. More details on this and the broader scope of MiFID II/R for repo and SFT markets can be found in the updated ICMA FAQs.
MiFID II/R implementation of research unbundling for asset management
In the last two weeks of October 2017, ICMA’s Asset Management and Investors Council (AMIC) surveyed its members to discover firms' current intentions and progress regarding their implementation of MiFID II research unbundling with a specific focus on FICC research only. This summary sets out the key elements of the survey results, which are available here.
Thirty-three firms responded to the survey. In respect of types of firms, roughly two thirds of respondents were asset managers or investment funds and roughly one third were private banks.
The vast majority of firms, 96%, said they are aware of the application of the new rules and the ESMA guidance on FICC research. Some firms, 37%, said they were already compliant with the new rules, while the others are actively working on becoming compliant. Not surprisingly, the majority of firms, 89%, expect to be compliant by the 3 January 2018 deadline. The 11% who do not, are likely from countries who may not have the same implementation deadline for MiFID II, such as Switzerland. Half the firms have responded that they have not received guidance from their national regulator about the implementation of research unbundling for FICC research.
In line with market developments, the majority of asset managers intend to pay for research themselves. 67% of firms said they intend to pay for FICC Research using their P&L, 17% are still undecided, 8% do not intend to pay for external research, 4% intend to use an RPA funded by charge to clients and 4% intend to use a combination of the options. At the time of the survey, up to 46% of respondents said that they had not yet been approached by a significant majority (75%) of their existing FICC research providers.
The majority of respondents (58%) expect FICC research spend to increase. The remainder are equally split (21%) between FICC research spend staying the same and FICC research spend decreasing. The majority of respondents (83%) agree that they will use a smaller number of research providers once the new rules come into effect. The majority of respondents (65%) agree that the demand for FICC research is going down, while a minority (35%) say it will not change. 61% of respondents said they will not change their consumption from independent research providers, while 22% said they will consume more. In respect of broker research, 22% of respondents said they will not change their consumption, while 78% said they would consume less. So, overall, independent research providers are expected to get a larger slice out of the shrinking pie.
The majority of respondents (54%) believe the quality of research will not change following the implementation of MiFID II/R. However, 32% believe research will get worse, while 14% believe it will get better. The majority of asset managers are confident that the reduction in the number of FICC research providers will not have a negative impact on their funds’ performance. 86% of respondents said they are not concerned about this scenario, showing a potential oversupply of research. The majority of respondents (68%) said that they do not intend to or have not increased their in-house FICC research capacity because of the new rules.
Finally, with regard to the impact outside the EU, the majority of asset managers with global activities plan to unbundle fees globally. 61% said they plan to unbundle fees globally, 31% plan to pay for research in non-EU jurisdiction only for EU clients and only 8% plan to segregate the EU and non-EU businesses.
AMIC has promoted the survey among its members and stakeholders by launching it at the AMIC Conference in London on 8 November 2017. Depending on the appetite from members, AMIC may re-run the survey in late 2018 to assess the impact of the unbundling rules after they have been in force for a few months.
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