As the dust is settling from the implementation of MiFID II since the beginning of 2018, K&KGC has captured both remaining and new regulatory challenges that are need-to-know areas for the buy-side heads of trading at the Alpha Trader Forum roadshow meetings in London, Paris, Frankfurt and Stockholm this autumn.
We caught up with Vincent Dessard, Senior Regulatory Policy Advisor at EFAMA for further comments to our findings.
ESMA’s central facility in relation to instrument reference and trading data.
Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA) made an interesting statement in his speech on 3rd October 2018 on the “The state of implementation of MIFID II and preparing for Brexit” about ESMA’s preparation of a central facility for instrument reference and trading data. Considering the long standing and intense debate about consolidated tape in Europe, would you please elaborate about what you know about this initiative and to what extent it may benefit the buy-side trading community?
Vincent Dessard: First and foremost, thank you for allowing me to contribute with EFAMA’s perspectives in issue 14 of your excellent magazine. The Consolidated Tape (CT) has been on EFAMA’s wish list since the inception of drafting MiFID II.
The key benefit of a CT is to facilitate a “golden source of data”.
We could early on identify the benefits of a publicly mandated, single solution deployed across all asset classes. However, no multinational authority previously volunteered to take on that kind of role. The authorities also needed to offer the opportunity for multiple commercial providers of CT to promote market stability and competition.
ESMA has now confirmed the start of their CT development. While we would welcome a multi-asset solution with real-time tape, the starting point will be delayed tape for cash equities. Another development area I would like to propose for the future, to enhance and centralise the transparency of markets would be if the CT could also include trade reporting data for derivatives, securities financing transactions (SFT) and movements on bonds that are on an international central securities depository (ICSD). This would be useful to centralise even if not all instruments are reported in real-time.
I see clear benefits for the buy side with more centrally governed data supporting an improved price formation on the market.
CSDR preparations for the buy-side trading desk by September 2020
K&KGC have flagged this upcoming regulatory requirement to heads of trading and recommended that they analyse the root causes for failed settlements within their firm to prepare accordingly. We think the review should be done from multiple perspectives looking at types of asset classes and trades as well as analysis by counterparty. Settlement will likely have an increased importance in formal counterparty reviews in the future.
Vincent Dessard: I fully share your view that ‘settlement’ will be at the heart of the upcoming development for multiple reasons.
The CSDR settlement discipline proposes penalties, which will be a major change and additional pressure on market participants to settle their transactions.
The regulatory aspect of the buy-in regime is what concerns me the most. Specifically, the fact that the failing counterparty may be imposed to pay for all costs endured by its counterparty in OTC trading.
I would recommend that buy-side firm’s traders and middle office are appropriately trained and counterparty contracts are adjusted in order to adapt to mandatory settlement lead-times.
We would recommend that MiFID II investment firms set aside efforts to analyse their settlement flows, especially around securities borrowing, recall time as well as fail recovery mechanisms. Buy-in procedures might become extremely costly, especially for OTC trades (which is frequent for large or less liquid trades).
RTS28 reporting changes for 2019
The buy side and vendors have all reported that the RTS28 and RTS27 reporting initiatives in 2018 have, as yet, not resulted in any added value for their decision making. What changes would the buy side need to adapt in their 2019 RTS28 reporting?
Vincent Dessard: This question would benefit from answers from multiple angles.
From a buy-side perspective, I would agree that the benefits of the RTS27/28 reports are not yet visible. Consolidated tape will better serve the buy-side’s objectives.
From a regulator’s standpoint, the benefits of the RTS27/28 are more obvious. These reports were primarily developed for their benefit.
The regulators are currently spending a lot of time analysing and compiling the new types of data. You can for example already find more detailed ESMA analysis in their report on the use of derivatives. From my perspective, the ongoing effort by the authorities will allow for much quicker and more surgical fixes” when the next crisis will turn up.
Systematic Internaliser regime for fixed income.
In contrast to the previous heated equities trading discussions, the fixed income buy-side traders have not raised any concerns about the impending systematic internaliser regime for fixed income. What are your perspectives about this subject? If it happens, will it be business as usual?
Vincent Dessard: We keep monitoring this subject and we will be vocal, addressing our views if and when it seems like it actually will happen.
Looking from a bird’s perspective, non-equities products might not be the primary target for the SI regime because:
The way they trade are different.
Non-equities are more frequently traded off exchange and/or on larger tickets.
Non-equities are usually less liquid, requiring a different market infrastructure to guarantee a higher probability of execution.
In the event of an SI regime being extended for fixed income, we will seek to ensure that the use of waivers is duly protected.
Adjustments to equity venue operations under MiFID II
At the time we write this article we are still due to see ESMA’s anticipated adjustments to broker preferencing in periodic auctions. What progress and expectations do we foresee in this subject?
Vincent Dessard: ESMA published a consultation on 9th November 2018 with their calibration intentions for periodic auctions in the preamble. EFAMA is currently working on a response to this consultation which will be submitted by 11th January 2019.
Are there any other regulatory activities that EFAMA would like to highlight to the buy-side trading community?
Vincent Dessard: From my perspective the following capital markets issues need to be highlighted.
In the detailed review of EMIR, we are working on obtaining the clarification of the definition of “Small Financial Counterparties”, that are subject to new simplified rules, and the co-existence of Category 3 (8 BN Euro or below) within the clearing obligation. In addition to our effort, we would advise buy-side firms to reach out to their Treasuries working on an alignment of definitions.
Lastly, on SFTR, we would encourage firms to review ESMA’s draft RTS proposal from last year. We understand that there is l unlikely to be any extension to the September 2020 deadline. Technically speaking, we have already received a confirmation that the vast majority of the fields and their description will not change. Therefore, we would encourage every buy-side firm to start, if not yet done so, the implementation of the requirements. There will be a “test period” with sell-side obligations being applied as from March 2020 but (i) some sell side may request alignment as from that day; and (ii) the requirements applicable as from September are more detailed for funds and asset managers.
Implications of Brexit on the buy-side trading desk on both sides of the English Channel.
From a trading desk perspective, it seems that the majority of traders expect to keep working from their current locations. There will obviously be a duplication of MIC codes and incremental administrative burden with additional contracts for trading counterparties, for example, registering a new legal entity within EU27 in addition to London. What other implications would you foresee for the trading desk? How do you envisage the impact on current regulatory activities such as the double volume cap regime, fixed income bond transparency regime, trade and transaction reporting and RTS28 post Brexit?
Vincent Dessard: This is a very difficult question to answer with certainty, as it depends on the treatment given to all aspects of equivalence for financial activities which is part of the entire negotiation.
From my perspective, assuming ceteris paribus, the UK will be operationally equivalent from day 1. However, this does not mean that equivalence will be granted from day 1. The messages I have heard from both sides of the Channel are at least showing a willingness and intent to grant equivalence from day 1 if possible.
I anticipate a number of challenges of which one relates to the size of the counterparties and the second relates to the recognition of liquidity in third country markets due to the tick sizes regime for equities.
On the size of the counterparties, as the book will have to be partly split under additional licensed entities, the counterparty risk analysis will be more difficult to perform or might need to be adjusted as the split might set those firms in a lower risk tier.
On the recognition of liquid assets, with the UK becoming a third country, the volume of transactions used in MiFID II, RTS 11 tick size regime will need to be modified. As we already know, the tick size debate is not yet resolved. Depending on the outcome, there may be a large number of securities that would become classed as less liquid or where NCAs could force the qualification of liquid assets. From a trading perspective, I am of the opinion that this is to the detriment of market transparency.
EFAMA is the representative association for the European investment management industry. EFAMA represents through its 28-member associations, 62 corporate members and 25 associate members more than EUR 23 trillion in assets under management of which EUR 15.6 trillion managed by more than 60,000 investment funds at end 2017. Close to 32,000 of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) funds, with the remaining 28,300 funds composed of AIFs (Alternative Investment Funds).
More information: https://www.efama.org
Meet Vincent Dessard at the 7th annual Alpha Trader Forum Global Summit on 6th & 7th February in London.
Read the article in The Buy-side Perspectives: https://joom.ag/NN6a/p34