Non-EU firms consider replicating Mifid II’s RTS28

Author: Lizzie Meager | Published: 22 Nov 2017
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This article is published by IFLR Practice Insight, a new service launching soon. Practice Insight analyses how banks are reacting to new rules.

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Banks and asset managers in the US and Asia are looking closely at – and considering replicating – sweeping new EU markets legislation.

The Markets in Financial Instruments Directive (Mifid) II, which will be effective from January 2018, touches practically every area of European financial markets, from product governance to payments for investment research.

But regulatory technical standard (RTS) 28 – the Mifid standard covering quality of trade execution, aka best execution – has caught the eye of investment firms further afield. By forcing firms to demonstrate the quality of execution decisions in far more detail than ever before – for each trade, they must document the top five trading venues used, and make the information publicly available – RTS28 is a key pillar of Mifid II’s investor protection framework.

“People in the US are concerned that they won’t be able to provide the same level of transparency, openness and reporting that’s going to be required in the EU,” said Michael Aldridge, global head of trading services at IHS Markit, based in New York. “The quality of data that’s going to be available from trading venues, including systematic internalisers, will give EU firms some advantage.”

The new requirement sees a fundamental shift from the existing requirement to take ‘all reasonable steps’ to provide the best possible result for the client, to ‘all sufficient steps’, and broadens the current scope from just equities to 22 different asset classes.

This may come as a surprise to EU-based market participants, for whom Mifid II has been a reality for some years now. Many who were interviewed for this story were both unsure that the transparency benefits would outweigh the costs of complying with the directive – and somewhat astonished that others would comply out of choice.


  • Firms in the US and – to a lesser extent Asia – are eyeing Mifid II amid concerns its so-called best execution rule will put them at a competitive disadvantage to EU firms;
  • This may be surprising to EU market participants, who have spent the past few months and years lamenting the transformative new regulation;
  • Investment firms are concerned that once clients can get reams of data and proof of best execution from EU firms, they will expect it everywhere;
  • Changes in the longer term may also be regulator-driven - one EU national regulator told IFLR that he regularly receives calls from other regulators looking to understand the directive better.

But Gary Stone, regulatory policy analyst at Bloomberg in New York, said that Bloomberg’s best execution products are among the fastest-selling on offer, and that interest is coming from across the globe – not just Europe.

“The sellside is acutely aware of competition issues, and is trying to assess whether they will lose order flow if they don't provide certain services but their competitors do," he said. That could be just because the client wants the data, but it might be that they need it: EU-based buyside firms will be asking their US brokers for their order execution policy because they’ve got to write their own.

"The RTS28 conversation has really woken people up"

For big investment firms with global operations, complying with the highest standard of regulation the company is subject to anywhere makes sense. But it could go further than that, with fund managers that do not have an EU presence opting to provide a form of best execution too – firms that are unburdened by the high compliance costs in other areas, and can instead cherry-pick the pieces they like.

Monica Gogna, partner at Dechert in London, said that the number one Mifid II question she gets asked by non-EU clients is whether they will have to start doing something similar soon.

“I think the question of whether firms may start to over-comply, or provide similar types of information across client bases in different jurisdictions will be somewhat client-driven,” she added. “If there is a set of clients in Europe receiving extremely granular data on a regular basis then it’s natural that may prompt others to ask for similar information.”

Rebecca Healey, market structure specialist at Liquidnet agrees with this. "Local firms in other jurisdictions may not have to comply with Mifid, but they increasingly need to demonstrate to their clients that they're Mifid-aligned - particularly when it comes to unbundling research costs, and best execution," she said. "Firms might be beyond the European regulators' reach, but clients are demanding answers."

Data overload

Rob Moulton, co-chair of Latham & Watkins’ financial institutions group thinks buyside demands for more data will materialise mainly in the costs and charges space.

“There is an argument to be made that no one knows what to do with all this data, but if clients are getting the actual cost, profit and mark-up from European banks, they’re going to start asking others for it,” he said, adding that the requirement to list the top five execution venues by sub-asset class would also be of interest to clients.

Best execution: coming soon to Wall Street

“I’ve heard people say that they book 100% of their business through an affiliate, so what’s the point in telling people? And that’s surprising to me. Of course clients would want to know that,” added Moulton.

Best execution can mean different things for different types of investment firms, clients, and even orders. For bigger institutional players, size and liquidity tend to be the key execution factors, but for high-frequency trading firms, speed and price is more important.

“The RTS28 conversation has really woken people up, and this is coming up more and more, with some firms choosing to look at the Mifid guidelines, and opting to produce monthly reports,” added Aldridge. “It will be a challenge for US firms to gather it, but the data is out there so it can be pieced together.”

And a Switzerland-based asset manager agrees that the new framework could give European firms an additional edge. “Putting the costs aside, you can definitely take Mifid II as an opportunity to show clients and investors that you’re demonstrating the highest regulatory standard,” he said.

Best execution is not entirely new to the US market. The Securities and Exchange Commission’s (SEC) rule 606 covers so-called disclosure of order execution and order routing information for equities – but it’s retail only, and doesn’t go anywhere near as far as Mifid II.

The appetite is there, though: a 2015 poll by Tabb Group found that 49% of US investors were dissatisfied with the level of transparency they receive from their brokers.

Not just execution

The move by US firms follows predictions earlier in the year that many investment banks and buyside firms will roll out compliance with Mifid II’s research unbundling rules at a global level.

Earlier this month asset owners in the US called for the rules on research to be implemented stateside to ensure a level playing field and bring down costs for US investors. They think the rules will see them subsidising European investors, who can no longer receive investment research free of charge.

As for whether the SEC will follow in the footsteps of EU regulators, sources certainly think it’s possible.

Moulton also expects the product governance regime, in particular its requirement for manufacturers to have a target market in mind when creating new products, to be exported to other jurisdictions. “That would more likely be driven by regulators than clients,” he added.

And a director at an EU national regulator told Practice Insight that he regularly receives requests for more information on Mifid II from non-EU authorities.

“We get contacted frequently from third-country authorities who are keen to understand the regime and its impacts more deeply,” he said, speaking on the condition of anonymity. “I do think there will be a point in the future when other regulators implement similar rules. But that might come from the market first.

This article is published by IFLR Practice Insight, a new service launching soon. Practice Insight will analyse how financial institutions are reacting to new rules.

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