Following recent trips to Hong Kong and Singapore, and the east and west coasts of the US, Liquidnet’s Head of Market Structure & Strategy in EMEA, Rebecca Healey, shares her insight about what she heard from asset managers across the globe and how MiFiD II impacts them.
Buy side firms outside of Europe are keen to understand how the MiFID II regulation could affect them. Will firms be required to report all transactions to the EU authorities? Or provide best execution with the associated unbundling of research costs from transactions costs? Or, alternatively, could the provision of best execution potentially provide an opportunity for firms to answer client demands for increased transparency?
Under transaction reporting, MiFIR extends reach to branches of MiFID II investment firms. When a non-European firm falling within the definition of a third-country investment firm executes a transaction from its UK branch, it must report that transaction to their National Competent Authority (home regulator) in Europe. Any transactions made by a non-European firm, which are executed from its branches or offices located outside Europe, do not have to be transaction reported.
Transaction reporting also extends beyond European instruments to non-European instruments if the underlying is an instrument, index, or basket of instruments of either:
- European venue-listed instrument traded on venue (TOTV)
- European venue-listed instrument traded off-venue
- Non-European exchange-traded derivative with underlying in ESMA list
- Unlisted derivative with underlying in ESMA list
Execution: the best you’ve got?
If the local asset manager trades on a European venue or with a European broker, then they are owed best execution as a user of the venue, or client of the broker in question because the European venue or broker is obligated to provide best execution. The local asset manager is only required to provide best execution as per their local regulator as they are not a MiFID II investment firm. Only when the investment firm is a MiFID II investment firm based in Europe will they be required to unbundle or provide best execution according to MiFID II rules.
Through the looking glass: client demands for increased transparency
Many non-European asset managers are now finding that in order to win new client mandates, fund trustees and their end clients are requiring them to demonstrate a higher standard for MiFID II compliance — beyond their actual regulatory obligations. This affects the following areas:
• Best execution: Fund trustees and end clients are demanding increased transparency over research costs and consumption.
• Unbundling: If the local manager is not a MiFID II investment firm, there is no regulatory obligation to unbundle research payments — but it does seem to be the direction that the industry is headed across the globe.
Clearly, global asset management firms are discovering that the complexity of ring-fencing European operations is significant, both in terms of technology and the fiduciary duty of treating clients fairly.