The European Securities and Markets Authority (ESMA) has been very active this week, publishing several Q&A style reports in an attempt to answer the remaining burning questions about MiFID II implementation.
With less than nine months until the deadline, some would deem the reports ‘too little, too late’. Nevertheless, ESMA made its stance clear on several aspects of the regulation, including unbundling, systematic internalisers and best execution.
Fears of a potential loophole within the systematic internaliser regime led to both ESMA and the European Commission to urge firms to think about the ‘spirit of MiFID II.’ Banks have been warned against plans to network while operating as a systematic internaliser by authorities across Europe. ESMA’s latest Q&A addressed this in more detail.
Market participants will not be able to network multiple third parties under the systematic internaliser regime, although could be authorised to hedge positions from executing client orders.
It will need authorisation if an SI has an arrangement with clients which go beyond a bilateral interaction or on a regular basis, if it doesn’t undertake risk-facing activity, or if third-party buying and selling interests are executed OTC.
ESMA said the above “does not prevent SIs from hedging the positions arising from the execution of client orders”, as long as it does not lead to the SI executing non risk-facing transactions and bringing together multiple third party buying and selling interests.
Ultimately, it’s possible to establish a network under the regime similar to that of a trading venue, but ESMA wants to know about it.
As for unbundling, the sell-side face greater scrutiny on how they price research sold on to clients. ESMA explained this is particularly the case for firms providing execution services, “to enable them to evidence that their research pricing is not influenced or conditioned by other payments for execution services.”
Sell-side firms must keep in mind this additional responsibility when planning for MiFID II. Let’s not forget that just last month, the UK’s Financial Conduct Authority (FCA), slammed investment firms for failing to meet expectations on unbundling.
“We identified poor practices at the majority of firms we visited and several could not demonstrate meaningful improvements in terms of how they spend their customers’ money through their dealing commission arrangements,” the FCA said.
Finally, and perhaps most interesting of all, ESMA has given firms leeway on best execution reporting during the first year of MiFID II implementation. The authority recognised the data required to prove best execution may not be readily available to all companies in 2018.
“ESMA wishes to clarify that unless the firm is using a specific tool or the services of a third party data provider to assess execution quality, it will most likely be unable to provide in the first annual report any information required of RTS 28.” MiFID II ‘s RTS 28 refers to the annual publication of information on execution venues and on the quality of execution.
In response to this, ESMA said information on the top five venues and a summary of the outcomes achieved will suffice in the first year and still provide useful information to investors.
Burdens have been lifted for many as it appears ESMA is beginning to understand the industry is nowhere near ready for MiFID II implementation. Lack of data, understanding of responsibility and the potential loopholes remain an issue. We should expect many more Q&A type responses from ESMA over the coming months. Keep an eye on thetradenews.com for our coverage of those.
ESMA’s full responses can be found here and here.