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US market participants are holding out for a no-action letter on new reporting rules within the Markets in Financial Instruments Directive (Mifid) II, with some hoping for last-minute regulatory relief.
Trade reports contain data to be used for price formation and as evidence of best execution, and must be completed in near-real time via so-called approved publication agreements. The requirement is causing a headache for firms in the US in particular, that are already grappling with local reporting rules.
One US-based trader who wished to remain anonymous told IFLR Practice Insight that his firm is still hoping for a no-action letter from the Securities and Exchange Commission (SEC). There is form for it – the SEC issued three on research unbundling under Mifid II in late October following significant pressure from the market – but it’s far from certain.
The impact of trade reporting varies depending on the type of market being reported on: in highly illiquid markets with very little price transparency, smaller market participants will benefit significantly from the reports of others.
But one New York-based sellside trader explained that it’s a different story when it comes to much bigger trades in more liquid markets. “We’re worried about this because for really liquid markets, it’s less of a price transparency thing and more about flow transparency, which can get really messy,” he said, adding that the new rules could unintentionally allow front-running.
“The only people who are going to benefit from this in large trades are those scummy guys with the resources to build an algorithm that can recognise hedging patterns, then use it to front-run everyone,” he added. “We understand why the regulators want to see this, but does everyone need to? It’s like being forced to walk around Times Square with a sign declaring my trade.”
- US market participants have raised concerns over Mifid II’s far-reaching trade and transaction reporting rules;
- They argue the directive is inconsistent with US markets, with some holding out hope for a no action letter from the SEC;
- Some believe trade reporting will encourage or enable front-running by providing too much transparency to the wrong types of market participants;
- Meanwhile EU regulators have stressed the importance of transaction reporting in particular as many other segments of the regime, such as best execution, are based on it.
Meanwhile two private practice lawyers based in London told IFLR Practice Insight that the majority of their US clients are ignoring much of Mifid until it becomes a barrier to trade. “People in the US feel bombarded by a huge suite of documents, notices and changes of terms right at the last minute, yet they have their own end-of-year worries. The attitude is ‘why should I concern myself with yours too?’” said one, adding that some of her clients are also expecting a no action letter from the home regulator.
The other, a partner at a US law firm who advises buyside firms, said that much of the unpreparedness is down to fundamental differences in views on how the regime applies. Some believe that if the US affiliate is not involved in the subscription process then the regime doesn’t apply. Others argue that investors are not your clients so the disclosure rules can’t apply. “That lingering uncertainty is making it very difficult to advise clients on this,” she added.
Despite its extraterritorial reach, trade transparency is less of an issue for Asia as whether or not the obligation applies depends on a liquidity threshold test. Vijay Chander, head of fixed income at the Asia Securities Industry and Financial Markets Association (Asifma) said it would be ‘very surprising’ if many, or potentially any Asian bonds are captured by the rules.
“Even with the planned phase-in over the next four years that will tighten these thresholds, I expect the vast majority of Asian bonds to remain exempt,” he said.T+1 transaction reporting
Transaction reporting is less time-sensitive than trade reporting, but much more onerous in terms of the data required.
James Wallin, senior vice president of fixed income at Alliance Bernstein in New York believes that both Mifid II’s content and its overly prescriptive approach are inconsistent with the way US markets work.
“Transaction reporting is a big issue for us, as we work on a principal rather than agency market in fixed income,” he said at the Fixed Income Leaders’ Summit in Amsterdam last week. “It’s an area where the regulator really needs to establish some dialogue.”
All non-EU branches of Mifid-authorised investment firms are explicitly in scope of the transaction reporting requirement, even when that trade is executed outside of the EU and/or the instrument is listed elsewhere.
That means Asian firms are caught here; the obligation will apply even if the transaction isn’t conducted directly. Last week market participants in Hong Kong raised concerns over the extensive personal data that needs to be handed over under the directive; an issue echoed at the forum last week.
Stephane Malrai, global head of financial ecommerce at ING, said the firm has received multiple questions from Asian clients that don’t want to provide reams of personal information including passport numbers.
“But transaction reporting is so key because it’s going to help with all the other requirements like best execution,” said Philippe Guillot, markets directorate executive director at the French securities regulator, the AMF. “We will be focusing our efforts on a proper transaction reporting regime in the coming months.”
Time to panic
The depth of Mifid II education across the market was also a concern for panellists in Amsterdam last week.
"Being 100% ready for something this huge is simply wishful thinking"
“To be able to implement this properly we need to understand it and its technicalities,” said Malrai. “The fear I have is that a lot of people still have a lot to learn about it. January 2018 to September, even October will be critical, as many will realise they suddenly can’t access liquidity, for instance.”
It’s been widely reported that firms in Asia and the US have been blindsided by the directive’s extraterritorial reach, with many only realising they will have to comply within months of implementation. A poll of attendees, both EU and non-EU, at the event found 63% of respondents to be unprepared for the directive’s January 3 deadline.
And that confusion is not limited to the market itself. Denmark’s financial regulator said on Sunday that it was still grappling with fundamental, basic questions such as what constitutes marketing, and how costs should be relayed to customers.
“Being 100% ready for something this huge is simply wishful thinking,” said the AMF’s Guillot.
This article is published by IFLR Insight, a new service launching soon. IFLR Insight will analyse how financial institutions are reacting to new rules.
To sign up for Practice Insight's free weekly newsletter click here.