START YOUR ENGINES NOW.
|Industry participants may feel they have more breathing room now that MiFID has been delayed by a year to 2018 from 2017, but they should not become complacent. A poll at the recent FIX EMEA Conference showed that they have their work cut out for them.|
When asked if the firm’s best execution policy incudes a sufficient quantitative component to meet the upcoming requirements, only 25% of those polled in the audience said they had an internal system and accompanying policies that should be sufficient while 24% were leveraging vendor systems and had an adequate policy in place (Fig 1). This meant that over half were just at the reviewing stage, looking at alternatives to upgrade their policy and the underlying technology.
As for preparations for fixed income, which for the first time will be under the best execution regulatory scrutiny, again nearly half – 47% – do not have an adequate best execution policy in place while only 17% do. The remainder do but they are currently being reassessed (Fig 2).
All agree that the requirements for fixed income will be among the greatest to meet. Under the current MiFID II proposals, the regulators’ objectives are to encourage all organised trading on to regulated trading venues, similar to equities, and mandate a consistent level of pre- and post-trade transparency for all clients. The main concern is that while this works for equities, a greater number of fixed-income instruments currently trade over-the-counter (OTC). In addition, as research from TABB Group points out, “a company may issue only one or two classes of equity, but will issue debt spread across a range of products, most or all of which are rarely likely to trade, making it challenging to find continuous liquidity.”
Around half of the respondents believe that one of the main obstacles will be getting hold of sufficient and accurate enough data to create a statistical dataset while 21% see difficulties in the ability to evaluate classes of financial instruments with sufficient granularity (Fig 3). Other stumbling blocks include understanding the regulators’ requirements and fitting best execution into the current dealer market where clients respond to merchandise or submit request for quotes.
These views reflect other studies that show market participants are not ready. In a recent, MIFID webinar survey of 500 participants conducted by consultancy and technology provider Sapient Global Markets, only 10% said they “very ready” for the new regulation, while 90% said they were “not ready” or just “somewhat ready.”