ASKING ALL THE RIGHT QUESTIONS.
Eric Böss, Global Head of Trading at Allianz Global Investors, speaks to Best Execution about the impact of MiFID II on the buyside.
How has MiFID II impacted your industry?
I think this is the biggest financial regulation since Glass Steagall and it is causing one of the biggest overhauls we have seen in the industry in decades. This does not come as a surprise as it has arisen out of the global financial crisis, which was one of the largest financial breakdowns in years. In many ways equities is the asset class least impacted by MiFID II, but the unbundling between research and execution, as well as the best execution requirements, are definitely two of the biggest elephants in the room.
How do you think these requirements will change the way the trading industry executes?
My personal view is that if you have had a good best execution process and a well-run trading desk that was quantitative, qualitative and holistic with feedback loops that could measure performance, then your firm would not have to make any major changes to meet the new best execution requirements. However, if it did not, then you might have a lot of work to do.
Unbundling though will require a new infrastructure because asset managers will need to be much more granular in their budgeting for research and execution. The process will be simpler for those that have only one type of client or strategy, but it will be a challenge for global firms that are running multiple and overlapping strategies.
What should traders be doing now if they haven’t had a holistic approach?
I think it will be important to take a step back and review the execution process from 30,000 feet. While there is a tremendous amount of data around execution out there, this is not necessarily helping set up trading processes in the right way. Data in itself has no answers, you have to ask the right questions. One of the most significant changes on the research side is that asset managers will have to determine an appropriate price for a particular piece of research. One of the issues is that regulators offer little guidance on this and it is difficult because the value-add of research will differ depending on the size, style and strategy of a fund manager. For example, think of a Ä1bn fund and a Ä10m fund run by a similar strategy, should they pay the same for a particular research report or paper?
How do you envision this will change your consumption of research?
We have our own in-house team of analysts, but that doesn’t mean we do not buy content from third parties. MiFID II forces you to contemplate what you want to buy and what adds value to your alpha generating process; as well as what the appropriate price is. In general, I am seeing the industry taking a similar path to the one the music industry took years ago, in terms of payment models. At one end you will see the large incumbents, such as a Spotify type of organisation, where you can consume as much as you like for a flat fee, while at the other end there will be platforms where you can buy bits and pieces of research separately – similar to the old iTunes model of 99 cents per song.
I also see the risk of certain teams spinning out of the larger sellside firms to create their own smaller shops, and they are likely to use one of the many platforms that are emerging that offer a pricing menu. Their development is still at an early stage, but you can see people using them as a sales channel. I am not sure though that you will find the large sellside firms using them in the near term.
Have you had to make many changes to the trading model at Allianz?
We have always been an active manager based on fundamental research and split portfolio management, research and trading in the early 1990s. We believe that trading should be aligned with our portfolio managers’ investment style, in the best interest of our clients, and we use transaction cost analysis as well as other analytics to ensure that we are adding value throughout the value chain. We also have strong feedback loops to constantly check that. The difference today is that there are new and better-documented governance structures around the trading process and we are required to show that they are an integral part of our policy.
Given the scale of MiFID II, what are some of the challenges with implementation?
The implementation deadline has already been postponed, but I think that in some parts it is still in an unworkable and partly unclear state.
This means that you need to make sure that you build a lot of flexibility into your plans and programmes so that you can adapt to any future changes and interpretations. The first step is to look at the systems and processes you have in place, your research consumption and best execution guidelines and see what needs to be changed. For example, if you a have a system that allows you to set up commission sharing agreements to feed the research payment account, should you also have a direct payment process in parallel? Also, there are many uncertainties around fixed income and the handling of macro research. We will have to make decisions with incomplete information because the regulators will not be offering enough guidance ahead of January 2018.
Decisions also have to be made as to what you want to outsource and keep in-house, because the industry is in a constant state of change. In our case, we want to focus on our core business, which is running money, and keep risk management in-house while outsourcing large parts of IT. We do not need to do the coding for the systems we use.
How prepared are the buyside for MiFID II?
I think 90% to 95% of what MiFID II wants to achieve is clear to asset management firms, so they have a good enough understanding of the direction of travel. One of the problems though is that people are holding back investments at the moment, waiting for more clarity, which means that there could be a rush closer to the implementation deadline, which will cause bottlenecks with on-boarding and implementation.
Biography: Eric Böss is Global Head of Trading with Allianz Global Investors, which he joined in 1994. He is responsible for the trading implementation of investment strategies across all asset classes. Eric was previously Global Head of Derivatives, leading the European Equity Derivatives team. He also traded fixed-income, equity and commodity derivatives. Eric Böss previously worked at Dresdner Bank. He is a CFA charterholder.