IN EQUITIES AND BEYOND.
Per Lovén, Commercial Director at TRADEcho outlines the impact of MiFID II on trade transparency, and explains how this will differ between equities and other asset classes.
MiFID II brings rather dramatic change to the trade transparency space. How will this affect the market and impact various market participants?
There are fundamental changes in terms of trade transparency between MiFID as it stands today and what will be required under MiFID II. For MiFID II, the requirements change from covering only equities and equity-related instruments, to a much broader universe, including fixed income and derivatives. The instrument universe affected will go from some 7,000 instruments to somewhere between 15 and 20 million instruments. It’s hard to say at this point because we don’t know exactly in terms of packaged deals and derivatives contracts.
Additionally, we will see a fundamental change in pre-trade transparency obligations under MiFID II with the Systematic Internaliser (SI) regime. Banks and brokers who today run broker crossing networks (BCNs) will, under MiFID II, to a large extent operate as SIs, which involves pre-quoting requirements.
Furthermore, the hierarchy around who has the reporting obligation in any given scenario is defined to a detailed extent under MiFID II. This is very different from the reporting obligations under MiFID, where there are no clear rules, resulting in over reporting and distortion of the view of real liquidity in the market. Under MiFID II, if a trade is executed on a venue (Regulated Market or MTF), the venue will report the trade to the market. If the trade is executed against a SI, then the SI has the reporting obligation. In other scenarios, it’s the seller’s obligation to report the trade.
Ultimately, the main changes can be outlined as:
- Extension of instruments covered, from equity and equity-like only, to also include fixed income and derivatives.
- Enhanced use of the Systematic Internaliser regime.
- Defined rules hierarchy around who has the reporting obligation.
As a result of this, trade reporting changes from being purely a sellside brokerage function, to something that will impact all market participants.
MiFID was very much the first step towards trade transparency in the market, and led to the creation of Boat Services (at the time a consortium of 9 investment banks). Boat has been servicing the market as a leading trade data monitor (TDM) ever since, and has a flawless track record in this space.
Boat has certainly evolved since those early days, and through the partnership with the London Stock Exchange, Boat has seen the creation of TRADEcho. TRADEcho is the approved publication arrangement (APA) for the future. TRADEcho will offer all relevant services for trade transparency under MiFID II, covering all asset classes and every instrument in terms of pre- and post-trade transparency in Europe.
Are there differences as to how certain instruments or asset classes are treated under MiFID II?
Under MiFID II the rules around trade reporting time limits are changing, where trades must be reported within 1 minute for equities and 15 minutes for other asset classes. Furthermore, there are differences around deferrals as well as if an instrument is deemed liquid or illiquid.
The main change is probably more around the practical impact on different asset classes. These changes will affect fixed income market participants in a profound way. It will offer more transparency to the fixed income market, and will change how people understand the market and how one can measure best execution. Ultimately, this will impact how trading decisions are made. In general, with more data and transparency, market participants can get a better idea of the implicit cost of a trade.
Fixed income is still very much an OTC market, quote-driven rather than order-driven, and less electronic than say equities. Market participants have a lot of work to do, both on the buy- and sellside, to ensure they capture all trades in an electronic environment and record the time stamp of the execution, which will determine when this needs to be reported. This market is going through a profound transformation, driven by electronification, data and transparency.
What can firms do to help ease the burden of MiFID II trade transparency requirements for themselves and their clients?
With the increasing transparency obligations under MiFID II it is important that firms have a solution that they are confident will report their trades accurately and on time.
TRADEcho combines 10 years of trade reporting experience from Boat Services and the London Stock Exchange, resulting in unparalleled expertise in transparency services. We have an unmatched understanding of transparency regulation, its impact, and how to tailor reporting solutions for all market participants.
In terms of pre-trade transparency, we offer a solution for Systematic Internalisers, both around determination and quoting. On the post-trade side, we offer a market leading APA solution for trade publication. Here, we will cover every instrument that is captured by trade transparency regulation in Europe, hence the natural choice for any trading across asset classes. We also facilitate an integrated assisted reporting solution that brokers can offer their clients, potentially essential for sales desks (again, unique in the sense it covers all asset classes).
The most interesting thing we offer is the Smart Report Router (SRR), which solves the real issue in the market. TRADEcho’s SRR helps firms determine if a trade has to be reported, and when regulatory criteria is met, publishes the trade to an APA of choice. The SRR works by measuring all trades against relevant legislation and then defines the reporting obligation for the firm. This is a unique value we provide to the market by solving a problem that many firms are struggling with.