Global Conference 2016: Spotlight On MiFID II | SS&C Eze

MiFID II was one of the central discussions at this year’s EzeSoft Global Conference in March. Justin Tourtelotte, Director of Eze Compliance and Commissions Consulting, led an expert panel which included Spencer Mindlin, Analyst at Aite Group; David Scalzetti, Senior Director of Regulatory Products at Interactive Data; Charles Walters, Chief Information Officer at Halcyon Asset Management; and Daniel Viola of the Regulatory and Compliance Group at Sadis & Goldberg. Their conclusion? Start preparing now. Here are four areas to consider:

Transaction Reporting: The expansion of transaction reporting under MiFID II is a big departure from the more limited scope of MiFID I. Firms based outside of EU will have to disclose more proprietary information than ever before if they are counterparties in transactions with EU traders, such as buyers, sellers and decision makers.

Best execution: While best execution is nothing new, this is the first time firms are being required to demonstrate to clients or regulators how they’re complying with the policies they set to ensure best execution. Firms will need to solicit RFQs from multiple brokers and be prepared to demonstrate why they chose to trade the way they did. This can prove particularly challenging in several ways:

• Quantifying best execution may be challenging in asset classes outside of equities. For instance, in high-yield debt, there will likely be a need to aggregate pricing streams to demonstrate advantage versus other brokers.
• In OTC derivatives, issues such as price, likelihood of execution and settlement, liquidity and other unique execution characteristics may be tough to define, so firms will need to have detailed policies and procedures in place to defend their decisions. Firms accustomed to trading over the phone or IM may have some work to do in setting those procedures in place.

• Because the concept of best execution moves beyond price, the trading desk will need to be more aware about what’s going on in the middle- and back-office to answer regulators’ questions in those cases when executions are settled outside of the best quote. An integrated book of records will put firms in the best position to demonstrate a defined workflow designed to deliver best execution.

Compliance: Trading compliance systems, running pre-trade checks throughout the trading workflow, can help managers avoid Dark Pool Cap limits and Commodity Position limits proposed under MiFID II.

Unbundling: Managers need to sit down with asset owners and come up with a clear distinction of how much money will be budgeted toward investment research, a structure for how to evaluate and value research, and a very defined approach of how they’d use client money to pay for research – or else pay out of portfolio manager’s budget. Every commission will need to be unbundled to clearly delineate separate charges for execution and research. Firms will need to decide whether they’re funding research through Commission Sharing Arrangements, Research Payment Accounts or hard dollars. It’s certain that valuing research will become a very operationally intensive process. Tools that help manage it will become central to firms’ strategies.

What is Eze Software doing to prepare? We continue our deep dive into the regulatory details and adjust our development priorities to ensure Investment Suite will be a critical component of your MiFID II readiness strategy. For more, check out Adam De Rose’s video and Erik Schlesinger’s Inside Reference Data article.