ESMA’s Approach to a No-Deal Brexit

In recent months, the political landscapes of both Britain and mainland Europe have been dominated by talks of Brexit. Perhaps more than any other event in recent history, Brexit will seriously impact the state of markets across the whole of Europe. In particular, the uncertainty surrounding the timing and nature of the UK’s departure from the European Union, and in particular the possibility of a no-deal Brexit, has called into question the future of ESMA’s European financial regulations.

In an attempt to assuage doubts about how the regulations outlined by MiFID II and MiFIR would be impacted, ESMA has released a statement outlining their stance on 6 key areas of regulation in the event of a no-deal Brexit. In particular, ESMA discussed:

  1. The MiFID II C(6) carve-out
  2. Trading obligations for derivatives
  3. Third-country trading venues for the purpose of post-trade transparency and position limits
  4. Post-trade transparency for OTC transactions
  5. Third country benchmarks under BMR
  6. The ESMA register administrators

The C(6) carve-out is an exemption laid out in Annex 1 of MiFID II which outlines the criteria a derivative contract must meet so as not to be considered as a financial instrument. If a derivative contract meets these criteria, it will be eligible for the exemption outlined in section C(6) of MiFID II. These three criteria state that a derivative contract i) must qualify as a wholesale energy product, ii) must be traded on an OTF and iii) must be physically settled.

ESMA has stated that a no deal Brexit will impact the first two of these conditions. Firstly, they have clarified that ‘a derivative contract related to electricity or natural gas that would be exclusively produced, traded and delivered in the UK would no longer qualify as wholesale energy product post-Brexit’, and would therefore not be eligible for the C(6) carve-out.

Secondly, in instances where a derivative contract based on electricity or natural gas would no longer be eligible to the C(6) carve-out under MiFID II, it could still become a financial instrument under Section C(6) if it is traded on an EU regulated market, MTF or OTF.

With regards to trading obligations for derivatives, ESMA has stated that it does not believe that market participants will be unable to continue meeting their obligation for derivatives in the case of a no-deal Brexit. While most trading venues that allow for the execution of instruments subject to the trading obligation in the EU are based in the UK, most of these venues are in the process of establishing new trading venues in the EU27 and plan to offer the same product portfolio as they did in the UK. Despite this, ESMA has expressed that it will closely monitor ‘how liquidity develops post-Brexit and whether markets will be sufficiently liquid to allow EU27 market participants to execute transactions in derivatives subject to the trading obligation on eligible trading venues’.

ESMA continued that, in the event of a no-deal Brexit, UK trading venues will no longer be considered as EU trading venues. As a result of this, ‘transactions concluded on UK trading venues would be considered OTC-transactions and would be subject to the post-trade transparency requirements’ outlined by MiFIR. This has the further implication that, pending the publication of the outcome of relevant assessments, ESMA will not require EU27 investment firms to make transactions that are executed on UK trading venues public via an EU APA.

ESMA also wrote that, as with trading venues, a no-deal Brexit would mean that investment firms established in the UK would no longer be considered as EU investment firms, and would instead be considered as counterparties established in a third country. This means that EU investment firms are required to ‘make public transactions concluded OTC with UK counterparties via an APA established in the EU27’.

Finally, ESMA has claimed that a no-deal Brexit would result in UK administrators included in the ESMA register of administrators and third-country benchmarks being deleted from the ESMA register. Instead, they would qualify as third country administrators. Despite this, during the BMR transitional period, EU27 supervised entities would still be permitted to use the benchmarks provided by these UK administrators.

ESMA’s statement has certainly provided some much-needed clarity about the state of the financial regulatory landscape following the UK’s potentially hasty exit from the European Union. In the event of a no-deal Brexit, both the European Union and the UK will have to adopt new financial practices, and it seems that ESMA’s statement signifies the first step towards this reality.

Benjamin Parker, CEO of eflow, claimed that “Whilst a No-deal Brexit is not a situation that would be welcomed by most in the markets, the ESMA guidance is timely and provides something tangible for Market participants to work to”.

MiFID II as World Standard

While a number of American firms have chosen to adhere to certain regulations laid out by MiFID II, it has not as of yet been implemented as law in the United States. Not only that, but some regulations put in place by the SEC actively contradict the European regulatory framework of MiFID II.

However, this could be liable to change in the near future. The SEC is facing increasing pressure from a number of US Asset Managers to change its regulations to more closely align to MiFID II. If these changes are implemented by the SEC, MiFID II would become the de facto global standard for financial regulation.

Of particular contention is the issue surrounding payment for research. A key tenet of MiFID II states that payment for research, trading and other services should be unbundled (i.e. charged separately). The intention of this is to lower the amount of money spent on research through more efficient allocation of funds. However, under the SEC, it is not required that payment for research be unbundled, leading to a clear discrepency.

Furthermore, under MiFID II, fund managers are not permitted to pay for research with commission. Instead, payment for research should be provided in hard currency. Conversely, however, the SEC states that fund managers pay commission, and that research should not be paid for with hard dollars.

These blatant and direct contradictions mean that American firms cannot at present fully adopt MiFID II’s financial regulatory standards.

However, now that MiFID II has been in effect for nearly 15 months, the benefits of the restrictions it places on research payment are beginning to make themselves known. According to the FCA, spending on research in the UK has dropped by upwards of 30%, saving investors in British equity funds roughly £180m. An optimistic estimation made by the FCA states that, over the course of 5 years, this figure could be as high as £1bn.   

Many American asset managers claim that the SEC’s refusal to adopt a MiFID II-style regulatory framework is putting state-side investors at a disadvantage. This is particularly true when we consider that European investors operating within the United States are not bound by these same restrictive guidelines as domestic American firms.

In January of 2018, just as MiFID II was implemented across Europe, the SEC granted American firms a 30 month reprieve lasting until July 3rd, 2020. During this time, the SEC is willing to be somewhat lax with confusions surrounding transatlantic discrepancies with MiFID regulations. But with that deadline fast approaching, a hard and fast decision will need to be made before long. It may fall on senior buy-side managers to instigate a change: by providing the SEC with an assessment of their research use and the potential impact that unbundling may have on investors, the process of making MiFID II the American standard could be greatly expedited.

The One-Year Anniversary of MiFID II

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.

Platforms being forced to change strategy following MiFID II

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.

FCA Updates Position Limits for Commodity Derivative Contracts

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.

Asset Management Compliance – What’s Required by the EU?

At the start of 2018, the Markets in Financial Industries Directive (MiFID II) changed how banks, financial firms and trading venues carried out business on behalf of their customers. Building on regulations initially introduced in 2007, MiFID II aims to encourage investor confidence and ensure the financial markets are operating in the fairest way possible. By encouraging firms to unbundle costs and make their processes and products more transparent, regulators are essentially hoping to democratise the markets.

Amongst the transformative changes – making up the biggest overhaul to the financial markets in a decade – include new rules on how asset managers pay for the research they use to make investment decisions.

For asset management compliance in the modern financial world, the cost of research will need to be unbundled from other services sold by brokers, to give investors transparency and ensure they understand exactly what they are paying for. This clarity helps to demonstrate the decisions made by asset managers as independent, in the best interests of the investor, and not influenced by receiving research.

Asset management compliance in 2018

Over £8 trillion of assets are managed in the UK, making the UK’s asset management industry the largest in Europe and the second biggest in the world. Understanding what’s required for asset management compliance is crucial, especially when dealing with such a large industry.


As part of MiFID II’s investor protection framework, investment firms need to make explicit payments for research.

Under Article 24 of MiFID II, investment firms who provide portfolio management services cannot accept fees, commission or benefits (both monetary and non-monetary) from third parties in relation to the provision of the service to clients. Minor non-monetary benefits can be accepted if they enhance the service provided to a client, and won’t affect the firm’s duty to act in the best interests of the client.

In order to achieve asset management compliance, asset managers will need to carefully consider what research they receive and be more selective about the research they pay for in future.

Transaction reporting

Another important element for asset management compliance are the changes to transaction reporting. Firms will no longer be able to rely on brokers to report their executions, and they’ll need to take on the responsibility themselves. Transaction reporting requirements are broadened under MiFID II, with a significant increase in the amount of data required and the scope of financial instruments that need to be reported on. Asset managers will need to get to grips with a greater number of asset classes, many of which will require a deeper understanding of market activity and behaviours.

Post-trade transparency

As part of MiFID’s guidelines around post-trade transparency, asset managers will specifically need to ensure the volume, price and conclusion time of transactions are publicly reported for each transaction. When asset managers are trading with EU firms, they will predominantly act as the buyer, so the other party will take on the post-trade transparency measures. However, when an asset manager is dealing with a party outside of the European Union, it will be the asset manager’s responsibility to ensure the post-trade transparency measures take place.

Best execution

The new requirements around best execution mean that asset managers will need to reassess day-to-day operations to achieve asset management compliance. As part of MiFID II, more detail is required in execution policies, and policies should be reviewed annually. For firms executing orders, they will need to publish their top five execution venues each year, while the amount of information required from trading venues has also increased.

To keep on top of the new requirements, asset managers will need to take continual action to demonstrate they have the best framework in place to review performances and policies. Essentially, asset management compliance is about taking action to ensure policies are effective, processes are transparent and clients are always being given the best service.

How compliance can help your firm

It’s almost a year since MiFID II came into effect, and the positive impact it has had on the industry is hard to miss. Around half a billion transaction reports have been processed by the FCA market data processor – an increase of 55% from the same period in 2017. The reports are also more detailed and provide a clearer image of the market, with the MiFID II guidelines now requiring buyer identification, the decision maker and the type of execution within the firm.

MiFID II doesn’t just help the market though – there are plenty of benefits of compliance for firms. Overhauling existing systems and investing in new technology might seem time-consuming initially, but your firm will benefit from more efficient processes and happier customers in the long run.

Solve customer conflicts faster

Working towards asset management compliance can also lead to a reduction in both internal and external conflicts. One of the main issues firms have faced in the past is that inadequate records of sales transactions have led to conflicts of interest and, therefore, a decrease in customer trust.

MiFID II’s stringent requirements around communication and transparency are designed to improve complaint resolution and give investors more security and clarity during transactions. By ensuring a firm’s record keeping processes are compliant, asset managers can avoid the issues that come with conflicting memories of conversations. Firms can resolve any disputes or complaints faster and with more certainty, without running the risk of damaging customer relationships.

Get the right solutions in place for asset management compliance

There’s never been a better time for finance firms to assess and improve their business models. The wealth of data collected from new reporting requirements can be used as part of ongoing compliance monitoring and risk assessment, and gives firms greater insight into how they’re interacting with clients. By developing a comprehensive end-to-end view on client conversations and transactions, a standard best practice model can be curated.

This means more effective communication and, obviously, a competitive advantage. To make the most of these new market opportunities, choosing the right technology is crucial.

Eflow makes compliance simple. Our solutions are designed with you in mind, combining the benefits of an off-the-shelf solution with the flexibility and adaptability of something bespoke. Whether you’re focused on new reporting requirements or looking into secure data storage, eflow’s solutions can be easily integrated, and they’re fully compliant with all the latest regulations.

To find out more about asset management compliance and how we can help your firm to meet the latest requirements, contact us today.

Financial Advisers and the Struggle for MiFID Compliance

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.

Inducements Under MiFID II – How Should You Handle Them?

MiFID, the Markets in Financial Instruments Directive, is a fundamental part of the financial law in the European Union. It sets out standards for investment services and activities across the EU, although its influence stretches beyond European borders. This year’s update to the directive, the Markets in Financial Instruments Directive II (or MiFID II) significantly overhauled existing requirements of financial firms and marked a change in how firms communicate and report on their activities.

The new directive, featuring more than 1.4m paragraphs of rules, is designed to strengthen the protection of investors and improve market confidence, after a steady 10-year increase in suspected market abuse. Amongst the most notable changes for firms are the updated requirements around conflicts of interest, commission and inducements under MiFID II. Inducements (namely a fee, commission or non-monetary benefit) have long been considered problematic in the industry, with financial arrangements between product providers and investment firms potentially incentivising firms to promote a specific product to their clients.

Conflicts of interest and inducements under MiFID I

For MiFID I, firms were required to adhere to the following requirements around conflicts of interest and inducements:

  • Identify and manage conflicts of interest that may arise in business
  • Where conflicts of interests cannot be adequately managed, to disclose the nature and details of the conflict to clients, before any business is conducted.
  • Carefully consider the payment of fees or commissions (or other non-monetary benefits) between firms and advisory firms to ensure they aren’t an inducement (and therefore don’t create conflicts of interest)
  • Assess any payments to ensure they help the firm to act in the best interests of the client and that they improve the service the firm is able to provide to the client.

Firms were also required to conduct ongoing research into the conflicts that firms face, and put together policies to set out how these conflicts can be managed. In order for clients to make an informed decision on a service, any conflict of interest disclosures needed to be made in a durable medium and include sufficient detail.

What’s changed for inducements under MiFID II?

While these core requirements remain the same, regulations on inducements under MiFID II have been expanded.

When providing an investment service or ancillary service, an investment firm is only permitted to pay – or be paid – an inducement where the payment:

  • Improves the quality of the service to the client
  • Does not prevent the investment firm from acting honestly, fairly and professionally, and in the best interests of the clients

All relevant details (namely, the existence, nature and amount of the payment) must be clearly disclosed to the client before the service is provided. If the amount isn’t definitive, the method of calculating the account will also need to be disclosed to the client, in a manner that is comprehensive, accurate and understandable. Where applicable, the firm will also need to keep the client informed on mechanisms for transferring the fee, commission, monetary or non-monetary benefit.

Any payments or benefits (either received or provided by an investment firm) that are essential to the provision of investment services will not be considered inducements, providing they won’t result in a conflict with the firm’s requirement to act in its clients’ best interests. Examples of these payments or benefits include settlement and exchange fees, custody costs and legal fees.

The evidence required for inducements

In order to demonstrate that your firm is actively working towards MiFID II compliance, firms should hold evidence that any inducement it pays or receives is solely designed to improve the quality of service to a client. An inducement should meet the following criteria:

  • Be justified. The level of inducements received should be proportionate to the level of improved or additional services a client receives
  • Not personally benefit the firm, its shareholders or employees, without there being a substantial benefit for the client

As the rules around inducements under MiFID II state, an inducement shouldn’t be accepted if it leads to a client’s service being biased or distorted.

Preventing conflicts of interest

In order to ensure that firms act in the best interests of their clients, many of the changes to inducements under MiFID II are designed to prevent conflicts of interest from occurring. Previously, advisory firms could portray themselves as being independent, but receive payments from third parties, like product providers.

The following requirements are designed to increase transparency for clients and reduce conflicts of interest, and are relevant to companies intending to provide or receive inducements under MiFID II. Firms need to:

  • Act honestly, fairly and professionally, and always in the best interests of their clients
  • Actively work to identify and prevent conflicts of interest from occurring, and implement company-wide policies to prevent conflicts of interest affecting their clients
  • Price research separately, as opposed to supplying research as part of a bundle of services with no explicit charge

Staff targets and inducements under MiFID II

One of the best ways to approach the changes to inducement rules is to examine any staff performance targets that are currently set. Under MiFID II, firms are required to ensure that they don’t assess staff performance in a way that might encourage employees to give biased advice.

Investment firms will need to make sure there is no system of remuneration or sales targets that might incentivise staff members to recommend a particular option or financial instrument to a client, when something else might actually suit them better.

Firms can also take a close look at how their services or products are packaged, and make certain that they are as transparent as possible. Firms are required to inform clients whether it’s possible to purchase different parts of the package separately and the risks that may come with separating certain aspects. It’s also important to be honest about the costs of each individual service – again, keeping the clients’ best interests in mind.

Handling inducements under MiFID II

In order to comply with MiFID II, investment firms will need to review the existing policies and procedures around how they supply or receive inducements. Ultimately, firms will need to provide clear evidence that they keep the client at the forefront of their decision making, and that employees act honestly, fairly and professionally at all times.

Eflow is the perfect software to help your firm get organised and implement effective organisational procedures. With eflow, secure data storage and retrieval is easy, so you don’t have to worry about the administrative side of MiFID II. Instead, you can focus on driving your business to success in a fast-paced, global market.

To find out more about eflow, MiFID II or the latest rules on inducements, contact eflow Global today.

MiFID II Outsourcing: Key Factors to Consider

MiFID, the Markets in Financial Instruments Directive, has been operational across the European Union since 2007, but updates to the directive earlier this year have dramatically changed how financial firms work and communicate.

MiFID II, an updated version of the legislation, came into force in January this year. The latest framework aims to strengthen investor protection and improve the transparency of financial markets, to make them more efficient and resilient. With around 30,000 pages of rules, MiFID II was lauded as the biggest shake-up to European markets in a decade, featuring new requirements on everything from market structure to product governance.

The impact and aims of MiFID II

Since the regulation covers almost all aspects of trading across the EU, its impact has been widespread across the industry. For many, MiFID II outsourcing – particularly where software or systems are concerned – has been a necessary path for compliance.

Many firms are changing the way they communicate with clients and counterparts, while trading desks at banks have been forced to redefine how they do business. New rules around investment research now require separately funded asset managers to pay for analysts’ research and advice, in an effort to reduce the possibility of a conflict of interest.

These changes represent a major shift from the day-to-day practices of investment firms, particularly where research is concerned – previously, research would be included in a bundle of services, with no specific charge.

MiFID II also aims to tackle market abuse, which remains a major problem across the industry: “unusual trading” occurred before one in five takeover announcements in 2017, the highest level since the aftermath of the financial crisis in 2010. New reporting requirements under MiFID II will increase the amount of information available, helping regulators like the Financial Conduct Authority (FCA) to detect incidents of abuse.

What is required under MiFID II?

To be compliant with MiFID II, firms will need to spend time ensuring that their systems, organisational processes and tools meet strict new standards. Before considering whether MiFID II outsourcing is right for your company, it’s important to understand the new requirements and how they are likely to affect you.

The use of communication channels

MiFID II requires all communications that relate to the “reception, transmission and execution of client orders” to be recorded. This includes any communications that were “intended” to result in a transaction, regardless of whether the transaction was actually completed.

Under the new regulations, investment firms will need to take adequate steps to record relevant telephone conversations and electronic communications for their records. Although other methods of communication aren’t technically off-limits in MiFID II, the regulation states that any conversations will need to be made in a “durable” medium.

Face-to-face conversations may need to be recorded using either written minutes or notes, and they will be considered equivalent to orders received by telephone. Firms are also required to “take all reasonable steps” to prevent employees or (if you’re looking at MiFID II outsourcing) contractors from making, sending or receiving conversations on privately owned equipment, which can’t be recorded or copied.

Data storage under MiFID II

Before any conversations are recorded, firms will need to notify new and existing clients that future discussions around transactions may be recorded. These recordings should then be provided to the client if requested.

Otherwise, all communications regarding transactions will need to be stored for a minimum of five years – a substantial increase from the current period of six months. Since the data will be of a sensitive nature, it’s crucial that it’s both secure and easily accessible, should a regulator request something specific. Firms that use siloed systems or legacy technologies that may be inflexible with the new regulations should consider MiFID II outsourcing, to ensure their reporting remains accurate.

The prevention of market abuse

The latest updates in MiFID II significantly expand on the regulations around transaction reporting, as were initially set out in MiFID I. While firms were previously expected to guard against abuse in the marketplace, they are now also required to encourage fair and honest transactions, and promote market integrity.

Transaction reporting is essentially used to detect and prevent market abuse. These reports include information on types of financial instruments, when and how they’re traded and by whom. The information included in the report isn’t made public, and is instead used by the Financial Conduct Authority to monitor transactions across the marketplace. This is expected to be key in curbing market abuse, giving regulators the ability to track orders by trader or client in an estimated £50m orders per day.

Is MiFID II outsourcing worth it?

While MiFID II is set to have a positive impact on the market and investor confidence, it puts huge pressure on small and medium sized firms. The scope of requirements around reporting has increased substantially, and firms must now consider whether their infrastructure, administrative systems and methods of communication are up to scratch.

Educating your employees in-house can save a lot of time with certain aspects of the directive, and reduce the amount of MiFID II outsourcing you might need to do otherwise. By keeping all client communications to one or two channels (for example, email and telephone), you can simplify your process of data collection and ensure you’re not missing an important recording should the regulator request it. To be successful with this, employees will need to break the habit of using social media or personal phones to converse with clients.

When it comes to your software and systems, however, MiFID II outsourcing is the easiest route to take. Not only does outsourcing free up time, it means firms can focus on training up employees and creating income in a rapidly changing market.

There’s also the obvious benefit of cost saving that comes with using technology specifically designed for MiFID II compliance. With transaction reporting in particular, the number of fields have significantly increased and traditional databases are likely to struggle to process the data, especially if the information doesn’t fit into a required field. The data will then be rejected, resulting in inaccuracies – and it’s likely that an employee would have to manually fix the problem. With software used in MiFID II outsourcing, data can be filed and processed as-is, creating a quicker route to compliance.

Achieve data compliance with eflow

MiFID II’s strict regulations around data reporting and storage make it clear that the traditional processes of financial firms need to change. Opting for MiFID II outsourcing can positively impact both the efficiency of a business and its bottom line, so it’s important to choose software that will simplify your work – not complicate it.

The eflow solution is data storage made easy. Our product stores data in a WORM (write once, read many) device, meaning it can’t be modified once it’s written and you don’t have to worry about it being tampered with. With eflow, the search and retrieval of data is flexible and instant, making conforming to tight regulatory time frames effortless.

To find out more about eflow and how MiFID II might affect your firm, contact eflow Global today.

OTC Derivatives Reporting – Is Your Firm Compliant?

In January, MiFID II was brought into effect across Europe. The updated Markets in Financial Instruments Directive, which contains over 1.4 million paragraphs of rules and regulations for the financial sector, has changed how firms do business on a daily basis. Though it’s likely to take the sector years to fully realise the changes of MiFID II, firms who do not make a dedicated move towards compliance face a real risk of falling behind.

With MiFID II impacting everything from market structure to investor behaviour, there’s an incredible opportunity available for firms who can achieve compliance quickly. Getting the right processes and systems in place to handle MiFID II’s reporting measures – notably trade, transaction and OTC derivatives reporting – and record keeping will prevent firms from losing valuable data and falling foul of regulators at a later date.

The changes under MiFID II

While MiFID I, the original directive, focused primarily on harmonising regulation across European equity markets, the sizeable scope of MiFID II will affect a broad range of financial instruments. Most notably, with the introduction of OTC derivatives regulation and reporting.

The lack of regulation around the OTC market is frequently cited as one the problems that led to the worldwide financial crash in 2007-8. One regulator placed the market “at the heart” of the crisis, while another article referred to OTC derivatives as “the real cause”.

Under MiFID II, there’s a focus specifically on trading derivatives on venue. This will bring transparency to OTC trading, which has traditionally been conducted by two parties without any supervision. This transparency should provide better information on prices, force contracts to be standardised and reduce systemic risk for investors and regulators alike.

With an extensive transaction reporting system in place – designed to provide regulators with the information they need to monitor and detect market abuse – firms will be required to report much more information about their derivative transactions.

Introducing ISINs to OTC derivatives reporting

Since an outline to MiFID II was first announced, finding a comprehensive product identifier for OTC derivatives has been a thorny issue. In September 2015, EU regulators issued a requirement of ISINs (International Securities Identification Number), a coder that identifies a particular security.

The ISIN aligns with many of the MiFID II goals – it helps to improve transparency and clarity on price and volume in the financial markets, and it’s universally recognised. ISIN codes are made up of 12 characters, both letters and numbers. The code will primarily feature the country the company is based in and a random computer-generated complex formula, which prevents counterfeiting and forgery – another key part in regulators’ fight against market abuse.

Under MiFID II, the mandate for ISIN falls to the ANNA (Association of National Numbering Agencies) or, specifically, the DSB (the Derivatives Service Bureau).

OTC derivatives reporting measures

To be compliant with reporting measures, firms are now required to publish the details of their trades to an Approved Publication Arrangement (APA). MiFID II requires trades to be reported as soon as possible, with a limit of 15 minutes when dealing with off-venue (OTC) in bonds, structured finance and derivative products.

MiFID II transparency requirements will affect investment firms carrying on transactions outside of trading venues, if the instrument is ‘traded on a trading venue’ (also known as TOTV). To complicate OTC derivatives reporting, however, it might not always be clear whether the instrument has been TOTV. For example, it’s hard to know whether than OTC derivative is TOTV when it doesn’t have an issuer and it’s less standardised.

The challenges firms face

There are several challenges that financial firms face under new OTC derivatives reporting measures.

The greatest issue is the enormous amount of documentation required under MiFID II. Firms aren’t just required to aim for regulatory compliance; they’re also expected to analyse, understand and mitigate their exposure to market abuse and risk. For smaller firms in particular, a sizeable operational challenge lies ahead.

Complying with stringent pre and post-trade requirements (many of which are time-sensitive) might be achievable in the day-to-day, but MiFID II’s changes to OTC derivatives reporting risks create an avalanche of work. Since derivatives are now regulated, they’re likely to be viewed as a less risky option – increasing the overall use of derivatives, and therefore the volume of trades. During busy periods or market turbulence, firms will still need to record complex details like where and when the trades are logged, and ensure their method of reporting is consistent with industry-wide standards.

As MiFID II states,

“Trading venues should ensure their trading systems are resilient and properly tested to deal with increased order flows or market stresses, and that circuit breakers are in place on trading venues to temporarily halt trading or constrain it if there are sudden unexpected price movements.”

To be compliant with new reporting measures, it’s crucial that your firm has the systems in place to handle large quantities of data at once. With data quality in OTC typically much lower, MiFID II marks the start of a concentrated effort to ensure OTC derivatives reporting data is more consistent and reliable for the future of finance.

Keep on top of regulatory reporting with eflow

The introduction of OTC derivatives reporting sounds daunting, but it’s a great opportunity to make improvements to out-of-date processes and legacy technology at your firm. By optimising your analytical capabilities, you can make the most of a market with higher quality and more consistent data, and refine your client service.

Eflow is a market-leading provider of regulatory compliance solutions. From regulatory reporting and MiFID II record keeping to best execution and preventative market abuse measures, eflow’s solutions are designed to fit seamlessly into your firm’s processes. They combine the benefits of a comprehensive, off-the-shelf solution with flexibility of something that’s custom-built. Best of all, they’re continually updated to reflect the latest regulations, so you can focus on driving your business forward.

To find out more about the changes to OTC derivatives reporting, the latest EU regulations and how eflow solutions can help your firm with compliance, get in touch with us today.

Feedback & Support
%d bloggers like this: