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This January marks the one year anniversary of MiFID II’s implementation. The alterations to the financial sector that this regulatory framework proposes are vast in scope; one year on, it is worth questioning how effective these proposed changes have been. Has MiFID II significantly impacted the financial sector? And if so, will it continue to do so in years to come?

Perhaps the most frequently cited change that MiFID II made as to how financial firms conduct their business is best execution. These best execution regulations were laid out in the Regulatory Technology Standards RTS 27 and RTS 28. These stated that firms must take ‘all sufficient steps’ to ensure that the best deal is made on behalf of the client.

The phrase ‘all sufficient steps’ has been given incomparable focus both by the financial media and financial firms themselves, but it seems that firms are struggling to implement the necessary measures to achieve this goal. A recent survey conducted with 100 capital markets firms from across the UK and Europe, 29 percent claimed that best execution posed the biggest challenge to following MiFID II’s regulations, while a majority 65 percent stated that they had ‘no adequate or systematic method in place to monitor trades in accordance with best execution criteria’.

With that being said, there is no need to be overly pessimistic about the future of MiFID II’s best execution guidelines. This year of struggling will likely have demonstrated the importance of investing in the regulatory solutions necessary to adhere to MiFID II’s strict guidelines. As time moves on, firms will only become more and more capable of being MiFID II compliant.

Another key focus of MiFID II is transparency with regards to regulatory reporting. These measures are intended to ensure that executing firms make detailed records of any and all trades, so as to increase the transparency of the market and deter market abuse.

However, as mentioned in a previous eflow blog post, a great deal of misunderstanding has pockmarked many firms’ attempts to increase transparency. Ambiguity about how to correctly file reports, inconsistent ISINs, and confusion about the culpability of third-country firms has led to a swathe of unacceptable reports being rejected by national competent authorities across Europe.

The consequence of this confusion surrounding transaction reporting has led some to believe that there have been a shift towards trading on alternative venues – a move which greatly undermines MiFID II’s authority as a piece of financial regulatory legislation.

If this is to be avoided, and firms are going to gain a better understanding of how to correctly file transaction reports so as to increase market transparency in 2019, these uncertainties must be cleared up by firms, national competent authorities and ESMA alike.

All in all, a year on from its implementation, the true impact of MiFID II is still yet to be seen. Whether or not it will ultimately leave the financial sector in better shape than it found it has not yet been decided.

What cannot be denied, however, is the fact that it has and still is significantly altering the financial landscape. In an ideal world, these changes will eventually lead to a more transparent, reliable and competitive market as firms begin to better understand the nature of the changes that MiFID II has implemented. What’s more, despite uncertain results 12 months in, there does exist a sense of hope throughout the industry that this ideal might eventually become a reality.

Financial advisers may be forced to leave behind old legacy platforms and wraps in favour of newer systems if they wish to achieve total MiFID II-compliance.

Investment platforms have become increasingly commonplace in the past several years. Since just 2008, the platform sector has increased in value from £180bn to £592bn in 2016.

In the past several years, however, there has been a growing sense of dissatisfaction with the platforms and wraps on offer to both financial advisers and consumers. In June 2017, the UK’s Financial Conduct Authority (FCA) acknowledged this by beginning MS17/1 – a market study into investment platforms. The study claims that ‘investment platforms are increasingly being used by consumers and financial advisers’ and outlines its primary focus as being to ‘improve competition within this market and develop better consumer outcomes’.

While this market study has not been completed as of yet, the interim report published in June 2018 outlines several key problem areas which FCA argues must be rectified. These include, but are not limited to, the following:

1. Switching between platforms must be made easier  
2. Comparisons between platforms must be made easier by way of an increase in transparency 
3. Consumers with large cash balances must be made aware of capital erosion risks

While these issues may have may have been simple inconveniences prior to 2018, since MiFID II was implemented on January 3, they have become legal necessities. As such, the pressure on platforms to make these changes has been greatly increased in the last 12 months, likely meaning that any change will be greatly expedited.

If platforms hope to become MiFID-compliant and remain viable, they must provide clearer breakdowns of fees, better cost and charges disclosure, more accurate and thorough transaction reporting and, more broadly, a more involved and supportive service.

Speaking at an outsourcing masterclass for FTAdviser, Lawrence Cook – director at Thesis Asset Management – claimed that the platforms which will thrive in the post-MiFID II economic landscape will be those that offer some form of collaboration with the advisers using them. There has to be a partnership beyond a simple service.   

Cook went on to argue that platforms must consider the long term. While most platforms put a lot of focus into helping clients in the accumulation stage, cook stressed that platforms must begin to consider how best to cater for clients in the decumulation phase.

This is just one of an innumerable set of adjustments that must be made within the financial sector if total compliance with MiFID II is to be reached. Platforms must adapt to the new financial landscape if they are to have any chance of surviving and thriving in the coming years.

On October 22, the United Kingdom Financial Conduct Authority (FCA) updated its webpage on position limits for commodity derivative contracts.

Under regulation 16 of the European Securities and Markets Authority’s (ESMA’s) Financial Services and Markets Act 2000, European National Competent Authorities (NCAs) were granted the power to establish position limits on commodity derivative contracts. With the implementation of MiFID II and MiFIR in January 2018, new regulations relating to commodity derivatives were implemented in attempt to ensure that participants in commodity derivative markets are appropriately regulated and supervised.

RTS 21, implemented as part of MiFID II, outlines a methodology to be followed by NCAs when setting position limits. These limits apply to contracts traded on trading venues and their economically equivalent OTC (EEOTC) contracts. RTS 21 also specifies that liquid contracts should receive bespoke position limits as set by the relevant NCAs.

In instances when multiple contracts are based on identical contract specifications, FCA retains the right to aggregate these contracts. In cases such as these, a single overall limit will apply to the primary contract incorporating those identified as mini, Balance of the Month (Balmo), mini-Balmo, or other contracts. It is important to note that, while a single position limit may apply to all positions in contracts which are aggregated together, separate position reports are still required for each commodity derivative. This is specified in Article 58 of MiFID II and MAR 10 of the FCA Handbook.

As is stated on FCA’s website, these position limits are not static, and FCA reserves the right to ‘change a position limit as a result of an ESMA Opinion, or in the event we decide it is necessary to do so’. Bearing this in mind, FCA have just implemented their most recent string of updates.

The biggest changes made by FCA have been the updates made to its bespoke position limits for a number of commodity derivatives traded on ICE Futures in the United Kingdom. The update has been made in the wake of ICE Futures’ most recent update of its range of products.

FCA has made the following amendments:

1. The Gasoil Diff – Singapore Gasoil (Platts) vs Singapore Gasoil 0.05% (Platts) Future now has an aggregating contract

2. Data for bespoke contracts also includes a new contract launched by ICE Futures on October 22, namely, Permian WTI oil. However, a position limit has not yet been set for the venue product code (VPC). In this instance, FCA are likely waiting for the contract to develop sufficient maturity so as to allow a more accurate position limit to be set in accordance with ESMA’s methodology for setting position limits as outlined in RTS 21.

3. Two new de minimis aggregated contracts have been added. These are TD19 Cross Med (Ceyhan to Lavera) (Baltic) Future, and TD9 FFA – Caribbean to US Gulf (Baltic) Future.

Two other adjustments have also been made to FCA’s webpage on Position Limits for Commodity Derivative Contracts. The spreadsheet listing the full aggregation of all possible VCPs has been updated for the purpose of monitoring position limits.

As well as this, FCA is also currently reviewing the spot month limit it has currently published for ICE Futures Natural Gas. The limit published on FCA’s site contradicts ESMA’s published limit. This, according to FCA, can be explained by way of nothing more than a simple typographical mistake, and will be immediately adjusted.

For a comprehensive overview of FCA’s position limits for commodity derivative contracts, visit FCA’s website.

As we move towards the anniversary of MiFID II’s implementation, the FCA are becoming increasingly stringent in their enforcement of the regulations laid out there.

While the FCA are obviously aiming for total MiFID compliance, they do seem to have a select number of specific concerns. In particular, the FCA’s most recent push for MiFID compliance is focussed on the issue of financial advisers providing explanations of their costs and charges to clients. This is a key element of MiFID’s insistence on transparency and investor protection, owing to the fact that it allows potential customers to compare costs between different advisers. As the year comes to a close, the FCA are beginning to lose patience with advisers who are still yet to comply with this facet of MiFID II.

Closely tied to this is the issue of record keeping. In order to provide clients with the information they need regarding cost, advisers must ensure that they keep records which will allow this. As such, it seems this new push by the FCA will also involve a fair amount of scrutiny over record keeping – another central tenet of the most recent iteration of MiFID.  

To this end, FCA has promised to undertake a mystery shopping initiative to ascertain which advisers are most culpable. This will involve FCA representatives approaching advisers in the role of potential customers so as to ascertain how closely they are adhering to MiFID II’s regulatory guidelines relating to transparency of cost.

This is supported by claims made by FCA Chief Executive Andrew Bailey. In June of this year, he claimed that the FCA would begin to hold firms to account for failing to comply with MiFID. He stated that he had taken a more lenient approach in the months immediately following MiFID II’s implementation on 3 january in an attempt to give firms the necessary time to adopt to the new legislative framework.

However, as we approach the end of 2018, the FCA’s patience seems to have run out. As reported in an article by FTAdviser, an unidentified FCA spokesperson has re-emphasised that ‘MiFID II now requires the disclosure of more detail on costs and charges’. He continues that ‘all costs must now be aggregated and disclosed as a cash amount and a percentage’.

However, this stance does not necessarily acknowledge the difficulty in obtaining certain sets of data. In particular, many advisers have highlighted that, while direct costs are relatively easy to calculate, payments made by way of discounts and rebates are much hard to quantify.

As well as this, a number of firms remain uncertain about MiFID II’s regulations concerned with payment for research. While, generally speaking, advisers are not entitled to receive research for free, there are several exceptions to this rule. Many understand that they are required to pay for any research they receive, and that they must ensure that the research they receive is transparent. Despite this, there is still a reasonable amount of confusion about what firms are entitled to receive for free, thereby impacting the reliability and accuracy of their explanations of costs.

Clearly then, like so many other issues surround MiFID II, a number of the issues arising can be ascribed to a simple lack of understanding with regards to what is required of different parties. However, as time continues to tick by, this excuse is becoming less and less viable. The FCA is simply no longer willing to accept uncertainty or ignorance as an acceptable reason for lack of compliance. If advisers wish to avoid hefty fines or other legal repercussions, they must attempt to adhere to MiFID II’s regulatory guidelines, regardless of the difficulty this may entail.

Ever since 2015, the Financial Conduct Authority (FCA) have been increasingly focussed on the minimisation of market abuse within the asset management industry.

The origin of the FCA’s most recent campaign against market abuse can be traced back to the findings of a thematic report published by the FCA in 2015. The report, entitled Thematic Report 15/1: Asset Management Firms and the Risk of Market Abuse (TR15/1), found that only ‘a small number of firms’ had enacted ‘comprehensive’ procedures to control market abuse, and that in the majority of firms, ‘further work is required to ensure these [procedures] operate effectively and cover all material risks’.

The report goes on to cite particular shortfalls in the management of insider information and the effectiveness of post-trade surveillance. The report claims that ‘only a minority of firms had appropriate controls for these matters’.

Within a year, the FCA had taken action. A regulatory framework designed to appropriately deal with the findings of TR 15/1 was implemented on 3 July 2016 in the form of the FCA’s Market Abuse Regulation (MAR). The aim of MAR was to ‘increase market integrity and investor protection’. To do this, it enforced ‘prohibitions of insider dealing, unlawful disclosure of inside information and market manipulation’, and outlined ‘provisions to prevent and detect these’.

While TR 15/1 was published over 3 years ago, and the consequent MAR was implemented over 2 years ago, 2018 has seen a new and rejuvenated push against market abuse within the world of asset management. This is in no small part due to the implementation of MiFID II this January. The increased volumes of data which the FCA is now privy to, and the increased transparency therein, means that asset management firms are even less able to hide inadequate responses to market abuse risks.

The impact of MiFID II on the FCA’s fight against market abuse was almost immediately felt. On 25 January, just weeks after MiFID II’s implementation, Interactive Brokers (UK) LTD were fined £1,049,412 for their failure to report and adequately respond to suspicious client transactions in the period from February 2014-February 2015.

Now, as we come towards the end of Q3, the FCA are only increasing their efforts. As Michelle Kirschner reports, supervisory visits from the FCA to asset management firms are currently taking place, and will continue to do so for the foreseeable future. These visits are intended to inspect potential market abuse infringements directly, and will likely serve as a deterrent to a number of asset management firms.

These visits are being supplemented by investigatory questionnaires intended to uncover the degree to which asset management firms are successfully dealing with potential market abuse infringements. Mike Sheen, reporting for Investment Weekly, states that the following questions are included in the questionnaire:

• Do you require order and trade rationales to be documented before being submitted?

• Do you undertake surveillance (automated or manual), outside of front office, of your trading activities for market abuse?

• Do you have any communications surveillance in place (e.g. Bloomberg keyword monitoring, email monitoring, phone monitoring)?
  

Looking forward, it seems likely that MiFID II’s continued implementation will only increase the FCA’s efficacy and their ability to discover inadequate measures being taken against market abuse in asset management firms. The extent to which this will alter the procedures put in place by said firms, however, is still yet to be seen.