Duff & Phelps' Nick Bayley, managing director in the Compliance and Regulatory Consulting practice, has partnered with Hedgeweek to provide a monthly blog series providing insight on this imminent regulatory change.
Prior to Duff & Phelps, Nick was a Head of Department in the FCA's Markets Policy and International Division, FCA Senior Markets Advisor and was responsible for the UK regulator’s MiFID II Policy Project.
Unsurprisingly, even a MiFID II geek like me prefers to spend time enjoying the Lions tour and Wimbledon than with the FCA’s second MiFID II Policy Statement which runs to over a thousand pages, including the Handbook text.
Much work is still to be done, decisions to be made, vendors to be selected and contracts to be updated. Hopefully, though, before people disappear for their summer holidays, the following mid-year checklist will help them to serve a few aces. Such that when everyone returns at the start of September, discussions can move along at a faster pace; it certainly won’t be all strawberries and cream, admittedly, but MiFID firms needn’t feel totally overwhelmed by task of getting to January.
So, what would I put on my pre-holiday checklist?
1. Do Your Research Audit
Near the top of the list, in my view, is for managers to have completed their research audit. Understand what research you receive (don’t forget the definition of research is broad) which you value and which you don’t. Until you’ve done that, you cannot have a meaningful conversation with the sell-side. The sell-side will want to move things along and are thinking about questions such as ‘How far can we push the envelope in relation to pricing?’ ‘What is reasonable, and not reasonable, in terms of initial discount?’
What I am hearing is that some of the large sell-side firms who initially came out and said that they’d be charging GBP250,000 for this level of research and GBP500,000 for that level of research, are beginning to climb down off their perches and become a bit more pragmatic with their pricing.
Therefore, grade your research and understand what it is you value. That will help when you enter discussions. The sell-side will want to ensure they can keep their material on your front-office desks, but also need to avoid setting pricing expectations for the future that are unrealistic.
I expect the trickle of communication between the banks and fund managers to become a flood in the next couple of months.
2. Reporting and Transparency
Some MiFID firms, under the MiFID II post-transparency rules, face the prospect of having to publish trades for the first time, unless they are trading with a systematic internalizers. Consequently, the mindset among some managers is, ‘We only want to trade with systematic internalizer because we don’t want the responsibility of printing our own trades’. No, this is a bad idea.
When looking for cost-effective solutions for MiFID firms to print trades, the cost of using one of the Approved Publication Arrangements (APAs) can seem quite high. Certainly, for firms with higher trading volumes an APA is perfectly viable but if a fund manager only does a handful of trades a week that they have to print, the costs of an APA (perhaps GBP1,000 a month) are ludicrous.
So, before the summer, ask your brokers if they will offer a solution in the form of ‘assisted reporting’, as a commercial service to you. If you use a small number of brokers, the cost of that is likely to be far lower than finding an APA and printing your own trades. Helpfully, the FCA has also just confirmed that such a service could be offered by a broker for free, without it constituting an inducement.
We know the FCA is red-hot on asset managers’ best execution performance and they will be looking for managers’ broker selection to be based on appropriate criteria, such as price and quality of execution, service levels etc.; not on whether a particular broker gives an asset manager a convenient way of avoiding their obligations, but just because it happens to be a systematic internalizer.
3. Product Governance
Managers should not underestimate the work that may be involved around product governance. It is a key area of MiFID II and therefore demands a bit of thought: defining target markets for the fund(s), undertaking stress testing, risk analysis, cost structures and so on. Whether you are manufacturer or a distributer, or both, this is an area you will want to get into the detail on, sooner rather than later.
4. Establish Your Communication Strategy.
A fourth consideration on the pre-holiday checklist is to start thinking about how to communicate with your clients in a considered way. One that provides them with sufficient levels of detail in one hit, rather than feeding them information piecemeal.
Work out how many times you will need to communicate with clients (as few as possible) and put a timetable in place. You may need to start this soon if you expect to need lots of additional information from clients as a result of MiFID II changes. In other cases, it will be simply a matter of communicating with them clearly on what’s changing, and what’s not changing, ahead of the January deadline.
Without a communication plan, there’s a danger you’ll end up either peppering clients with lots of correspondence or communicating too little, too late. Good communication strategy will inspire confidence. Your clients don’t live and breathe market regulation every day (lucky them!), so if you can communicate with them clearly, concisely and authoritatively, it will have a positive impact and leave them thinking; ‘This manager really knows what they are doing’.
September seems a little way off yet and January 2018 still a distant blot on the horizon, but getting moving on some of the above should help you enjoy your time on the beach all the more. And, if you want some light holiday reading there’s always the FCA’s Policy Statement…