Sell-side and buy-side firms in Australia are starting to realise that the new financial markets rules in Europe, MiFID II, will impact them too, writes Bloomberg’s Mark Croxon.
While European firms have been grappling with becoming compliant before the January 2018 go-live date for a while now, many firms outside the EU are playing catch-up.
While European regulators don't have supervisory oversight on firms outside the European Union (EU), Australian firms with branches or subsidiaries in Europe will have to be compliant with MiFID II.
Also, any Australian firm that is transacting or trading financial instruments with European firms will be indirectly impacted.
This is because their European clients and counterparts are likely to demand additional disclosures and reports, in order for them to meet their own MiFID II obligations.
In some cases, they may even require changes in the way Australian firms conduct their business.
Understanding the perspectives of their European clients and counterparts will be crucial for firms in Australia to make sure they can meet their expectations and continue to do business with them when MiFID II comes into force.
Australian firms will have a series of challenges ranging from providing data for transaction and best execution reporting, to adapting their research and compliance management.
Providing more, and new, data
Australian asset managers typically either invest money from, or with, an EU-based asset manager, or send orders to an EU broker. Conversely, Australian brokers execute trades on behalf of EU asset managers.
In order to continue servicing European clientele, banks may face pressures to adapt their systems across the board.
To service EU professional clients on a cross-border basis, Australian investment managers need to register with ESMA, the European regulator, and be subject to the same standards as European firms, based upon the EU’s regulatory equivalence and reciprocity determinations.
For example, when an EU firm invests in an Australian asset manager, MiFID II’s investor protection and best execution rules are likely to lead the EU firm to monitor the quality of execution of the manager.
Consequently, the EU-based firm may asked the Australian manager to have an order execution policy describing how it takes what the European regulator calls “all sufficient steps” to obtain the best possible result for its clients.
The Australian brokers may also have to produce reports to prove it is following this order execution policy. Australian banks may even experience their EU customers seeking to apply the same reporting and disclosure standards that their EU brokers must meet.
Our interpretation of all “sufficient steps” means that systematic, automated analysis of transaction costs will need to be conducted, which is likely to necessitate an upgrade of existing systems.
Towards research unbundling
In the EU, research payments will have to be unbundled from execution commissions. This means funds will need to set an annual budget for research consumption, and fund that either from the management P&L, a research assessment from the client or by a transaction-based research commission.
Theoretically, these rules won't apply to the customers of Australian brokers on their research consumption activities within the EU, but EU customers may wish to operate under one set of operational controls, policies and procedures.
Because the buy side in the EU will be providing their investors with information on what they are paying for, buy-side firms across the globe may need to be put under pressure to answer that same question, from a competitiveness aspect.
Australian brokers should engage with the buy-side clients and offer guidance on the proper allocation of costs so, at least internally, the fund can “unbundle” from an accounting perspective, and perhaps pay for research against an invoice – as a service.
How to become MiFID II-friendly
Australian firms can begin to ensure they will be able to continue their business relations with EU firms by engaging with their customers and counterparts, and seek to understand and accommodate the requests that may come from them.
At the very least, step one should be for Australian firms to get a Legal Entity Identifier (LEI), a global standard that will become the EU standard for identifying firms. EU market participants will need this in order to be able to identify them in their internal systems and in their regulatory reports.
This is important as MiFID II could become a global regulatory benchmark. Many global firms will take a strategic approach to implementation, and adapt their compliance systems and processes to the toughest standard.
MiFID II could very well become a “best practice” and a driver of competitiveness.
Mark Croxon is the head of regulatory and market structure strategy for EMEA at Bloomberg.
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