Commitment to internalising trades will get a lot tougher under the revision of the Markets in Financial Instruments Directive (MiFID II). Beginning in Jan. 2018, when the regulation takes effect, brokers crossing non-equity instruments will face new obligations that will make manual processing highly impractical.
These are the five key takeaways for internalizers:
- MiFID II has a much broader impact than MiFID I; non-equities are now covered, affecting the future of over-the-counter (OTC) trading.
Starting in Jan. 2018, any investment firm trading against a client outside of an organised trading venue may get classed as a systematic internalizer, according to the parameters around scale and frequency set out by the European Securities and Markets Authority (ESMA). As OTC markets like fixed income have typically traded dealer-to-client, a lot of business will be redefined.
- New transparency rules have a big impact on business models, operations and technology.
Transparency rules limit ”dark” trading and increase disclosure on a pre- and post-trade basis, according to where trades are conducted and the size of transactions. As clients can better determine how close their prices were to the market price, sell-side firms will have to compete more on execution quality, as has been seen in the equity market.
- Banks and brokers will need to adapt if they want to stay in business. Complex rules per instrument mean that manual processes to enforce compliance should be avoided.
Tracking whether or not disclosure is needed can be very challenging; that’s why an electronic workflow can be invaluable for staying within the rules and providing a paper trail to demonstrate compliance. In addition to disclosure, there are reporting and recording requirements across the whole trade lifecycle, requiring data points to be captured pre-trade, at trade and post-trade, then routed via an effective workflow.
- Increased electronic workflows simplify MiFID II compliance, and at the same time allow for increased automation and efficiency.
Mapping and automating workflows reduces the likelihood of manual error, while also increasing the capacity to respond to regulatory demands for data and reports. Bringing those administrative tasks into an electronic workflow also allows the front and middle office to focus on delivering better service to clients and on handling more complex, time-consuming problems as they arise.
- Banks and brokers that adapt will gain a competitive advantage: access to more liquidity, better decision making, better service for customers and more order flow.
Addressing these processes with a single platform can increase a firm’s multi-asset capabilities by standardising service for clients across instruments. That will increase the potential for expansion of services into new instrument classes, which, in turn, can reduce total cost of ownership through adoption of a single multi-asset trading and risk platform. Many of the new rules apply across asset classes, creating a benefit to economies of scale for technology and operations.
Find out more about how MiFID II will impact your business here.
Tagged in: Institutional and Wholesale, Crossing, Internalizer, MIFD II, Systematic