The buy-side should be wary of passing too much responsibility for MiFID compliance onto their brokers, according to Brian Sentance, CEO of analytics and data management firm Xenomorph.
Despite the upheaval surrounding compliance with Europe’s MiFID regulation, Sentance believes the buy-side is leaving the bulk of the work to the sell-side. Transferred responsibilities include part or all of best execution, and trade and transaction reporting.
“From speaking with clients it seems that many of the big buy-side institutions have pushed the problem over on to the brokers,” says Sentance. “But although buy-side institutions can outsource processes such as transactions and trade reporting over to the broker, if the broker gets it wrong, the institutions are still responsible and still accountable to the regulator.”
If the regulators find that brokers have not been following institutions’ best execution policies, Sentance adds, the institutions would be deemed non-compliant with MiFID, leaving them open to fines.
One theory postulated for the lack of activity post-MiFID, says Sentance, is that the principles-based nature of MiFID means some firms are waiting for local regulators to tell them precisely what they need to change, rather than do a lot of expensive guesswork. “That might be a cheaper and more effective way of handling MiFID than investing heavily in something that is not clear on what it requires you to do,” he says.
MiFID’s best execution obligations are another area where there has been an apparent lack of change. Taken to its extreme, MiFID’s Article 21 could require a broker or asset manager to reproduce what was happening at a certain point in the market to explain why it made certain trading decisions on behalf of its clients. “The way a lot of the clients have got around it is to define a best execution policy that is incredibly simple, that says something like, ‘our execution policy is that we are going to get the best quote between these two brokers,’” he said. “They keep the execution policy simple, they achieve compliance, and as far as they are concerned, what’s the problem?”
Writing a more precise policy, he explained, could open a company up to data management challenges. “If you go for a really stringent policy, you need to store historic market data and all of the data relating to a particular transaction, and that can be a massive effort,” he said. “But if you define your policy somewhat loosely then it’s a big challenge that maybe you don’t have to face for a while.”