Vijay Chander, executive director of fixed income the Asia Securities Industry & Financial Markets Association (Asifma), analyses the extraterritorial reach of Mifid II. According to Chander, it is clear that market participants will be significantly affected on the buy- and sell-side and that anyone in the firing line should now be in full preparatory mode. On the big questions, for instance whether the shape of the financial markets will change, Vijay strikes a cautious note and lays the responsibility with Europe's overseers and whether they will be prepared to give full consideration to third country issues.
How will Mifid II impact your members in Asia and which participants or areas of activity will be most affected?
The range of impacts are quite significant and the vast majority of our members, both buy and sell side, will be affected. Of course, the extent of the impacts will vary from member to member, based on whether they have branches or subsidiaries in the EU (or in turn, if the entities of EU firms in Asia are themselves branches or subsidiaries), the booking models that they use and indeed the extent of trading activity in financial instruments admitted to trading and clearing in Europe that they are involved with. In terms of broad areas of impact, we have identified several: research unbundling; pre- and post-trade transparency; post trade reporting and instrument reference data; the trading obligation (for both equities and derivatives); best execution; and product manufacturing and distribution.
Now within these areas, there are a very large number of sub-topics that need to be addressed and, in any event, while these areas cover a large proportion of the impacts, they are by no means exhaustive.
What level of engagement have you seen among your members with Mifid II?
Starting approximately around the second quarter of 2017, we have seen a marked increase in member engagement on Mifid II issues. On the law firms and asset management firms, I would not characterise them as having low levels of interest – that might have been true some time back, when Mifid II was some way off, or was more distant compared to more pressing issues – say two to three years ago. But right now, I would say it is the top priority, given that we have barely three months to go. Again, this is not the time to be blasé. Speaking for my own Mifid II working group, I would say the major law firms and the other professional firms (primarily the Big 4 accounting firms) have been very engaged with us on this topic, holding a number of briefing sessions and, going forward, we expect to hold a number of webinars on the topics above. Issues such as research unbundling, for instance, have a major and direct impact on asset management firms.
What should national regulators and the members/market participants that will be affected be doing at this stage?
Given that the rules/technical standards and implementation guidelines are all in place, members should be – if they are not already – more or less in 'full speed ahead' mode on the practical front in terms of implementation, ensuring that their systems can capture all data required for, say, post-trade data reporting or being prepared to have order execution policies in place to comply with best execution requirements. They will also need to know if and when they are required to provide full transparency where pre-trade obligations may apply (if for instance the instrument that is listed in Europe that our member(s) trade in are liquid and our member entities are significant market makers or systematic internalisers (SI) in these instruments). They should also have systems in place to pay (for buy-side firms) and receive (for sell-side firms) and account for separate and distinct payments for research services. This is just gives you a flavour and a very small subset of the vast range of issues that firms have to grapple with as they move well into the implementation phase of Mifid II.
The main concern for regulators is to ensure that none of what the firms in their regulatory sphere are doing with Mifid II will breach local rules.
How have regulators reacted to this sort of extraterritorial rule-making? Does it chime with financial market developments in the region and will any of the Asian regimes aspire to achieve a benchmark of equivalence to Mifid II?
Obviously I cannot speak for the regulators, but to the extent that Mifid II directly conflicts with, or contradicts, local regulations – that is one area of Mifid II's extraterritorial reach that regulators may not like. For instance, Mifid II requires investment research to be paid and accounted for separately. Now in certain jurisdictions (I know this is true of the US for instance), in order to charge for research separately, an entity will have to register as an investment advisor. Of course, such changes in business models or requirements to register imposes certain costs, which creates an inconvenience for our member firms, besides potentially being in conflict with local rules.
In terms of Asian regimes trying to aspire to a benchmark of equivalence to Mifid II, again I cannot speak for the regulators – but given the immense amount of cost, resources and time that has gone into this Mifid II compliance exercise, all I can say is that I hope the local regimes are not considering something similar, at least in terms of all-encompassing reach and complexity.
How will the composition of the markets change: will there be fewer Asian participants in the European market or fewer European participants on Asian trading venues? How are these eventualities being resolved and have you seen positive developments in the resolution of these and other risks?
Again, it is too early to speculate or jump to conclusions on this topic. So, for example, yes, to the extent that Mifid II imposes specific restrictions on EU firms from trading on non-European venues that have not been deemed equivalent for say, the equities trading obligation, then of course, for legal and compliance reasons a number of EU-headquartered firms with branches in the region may not be able to participate on these non-equivalent Asian trading venues. But that in turn will depend on: how quickly the EU regulatory authorities make these equivalence determinations with respect to Asian venues; or whether these EU-headquartered institutions change their business/booking models to comply with these Mifid II requirements. As I said, these will become clearer only with the passage of time. Of course, each institution will look to resolve these eventualities in their own proprietary ways and there will be some visibility only after the fact, but I think it is fair to say that there is most definitely recognition with respect to these issues.
What sort of conversations has Asifma and its members had to have with the other GFMA associations globally?
Asifma has been very engaged, particularly with our sister institution in Europe, Afme, which is of course the best-positioned to lead (and has certainly done so) on the entire spectrum of Mifid II issues, across the piste. We have also discussed these topics with our sister institution in the US, Sifma (which is also affected by these broad extraterritorial impacts) and finally, GFMA itself for the broad range of knowledge and experience that they bring to this topic.
What will come next – what would you like to see happening in the next six months?
The next step will of course be to assess just how effective the long hours of effort and toil that have gone into this Mifid II implementation phase actually turn out to be – and we will not have to wait long for this. Come January 3 2018, or shortly thereafter, we will have a very good idea of how well our members based in the region are coping with Mifid II. In terms of the immediate future, we are more than happy to continue extending our full support to members as they approach the Mifid II implementation deadline. In this context, we aim to: publish a grid outlining the key Mifid II impacts, which we will distribute to our members; and, in conjunction with our professional firm members, hold a series of webinars on some of the key Mifid II topics, over the next couple of months. Most importantly, we hope and expect that our members will be both confident and ready to confront the challenges that Mifid II poses, with the approach of the Mifid II January 2018 'go live' deadline.
|About the author|
Vijay Chander is focused on various fixed income committees, playing a significant role in standardising credit markets to allow greater cross-border flows to improve liquidity and keep Asian savings in the region. He also helps address other initiatives in the tax and compliance areas.
Chander has over 25 years' experience on both the buy and sell sides of fixed income and credit, having worked at Citibank, Lehman Brothers, the Prudential, BNP Paribas, Bear Stearns and most recently at Standard Chartered where he was the global head of credit strategy. Chander's career has been largely focused on Asia and has worked in a variety of capacities, which include FX and credit trading/ structuring, risk management and credit portfolio management, analysis and strategy.
Chander has an MBA in Finance from Vanderbilt University in the US and a B.Commerce degree from the Vivekananda College, University of Madras in India. He speaks English, French and Mandarin Chinese.
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