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Two years since the implementation of MiFID II, BNY Mellon’s Pershing reviews its effectiveness; uncovers the pain-points for the back office particularly around the implication of data quality, and calls out what needs to change under “MiFID III” so that wealth managers and advisers can help achieve what the regulation intended.

Positive boost to transparency from MiFID II, but data overload is a risk

Investors now receive many more reports than they did before, as wealth managers have to provide investment performance and custody reports quarterly rather than twice a year. The requirement to now provide annual costs and charges reports has added to the already considerable amount of data sent to investors. Some estimates suggest investors typically receive 140 pages of data a year.

While transparency is a good thing, whether advised investors want all of these reports is not known. There is a danger that they may not be able to see the wood for the trees.

The regulator needs to work with the industry to reduce the volume of data sent to investors and improve its clarity. A framework is needed with clear, fair and not misleading information that makes it easy for investors to clearly compare cost, performance and derive value for money. For example, one industry-wide measure for ex ante and ex post costs and charges would be a progressive step.

Financial education must accompany cost and charges disclosure

While the drive to provide further transparency was noble, the detail of mandatory costs and charges disclosures required under MiFID II was a huge ask for the industry. There must be a greater focus on financial education to help investors make more informed decisions, without the direct cost to firms.

It makes complete sense that ESMA is reviewing whether an opt-out for non-retail clients from mandatory disclosure of costs and charges is required. The costs and benefits of delivering a MiFID-compliant solution were underestimated, and the industry is grappling with several challenges in delivering ex-post costs and charges, mainly due to the complexity of its scope and requirements. Until this happens, the true impact of costs and charges will remain unclear.

Asset managers have seen cost compression, but more to come for private client firms

So far price competition from MiFID II has affected the asset management industry, driving costs down and lowering the total cost of ownership for some portfolios. Private client firms add other costs to give a headline percentage for the total cost or ownership, so the lower portfolio cost means they have been able to hold the line on their fees a little longer. Ultimately though, we would expect to see this price compression affect private client firms’ fees too.

Michael Horan, head of trading:

Lower research and execution costs for investors, but data needs to be looked at

One of the most successful areas in terms of transparency has been the unbundling of research and execution costs. Firstly, investors’ execution costs have fallen, resultant from most buy-side firms deciding to shoulder the cost burden for research as a carved-out item. But also, we are now in an era where there is far more transparency over the quality of research than ever before, which should drive better investment decisions for the buy-side. However, for investment banks, the new transparency that unbundling has ushered in has unfortunately led to a reduction in revenues for the provision of research, which has fallen considerably over the last two years.

As far as trading is concerned, there is certainly more transparency around bond and equity trading, with more visibility in both pre and post trade. However, this benefit can only be realised at a considerable cost. This is due to the fact that data costs over the last two years have failed to be democratised in terms of the spirit of the MIFID II text. The jury remains out on whether trading venues are pricing their data based on a ‘reasonable commercial basis’. It is welcome that ESMA is looking into this as part of their MIFID II review, with mounting action now for a consolidated tape, just like in the US market.

Linda Gibson, head of regulatory change and compliance risk:

The effectiveness of transaction reporting relies on a better definition of quality

Additionally, the uptick in the data to be reported for each transaction report was significant and probably the most complex piece of MiFID II to get right. The reality is, the industry is struggling. A recent freedom of information request revealed that 68.4% of firms say they have received no feedback on the accuracy of their reporting from regulators, making it difficult to know whether the significant uptick in reporting is meeting its objective.

Quality transaction reporting is required to help regulators monitor for market abuse and insider dealing, but without timely feedback on the quality of those reports (and action when they are non-compliant) MiFID II will not meet its key objectives in this area. It is instead creating more work and expense for firms to correct when it goes wrong. MiFID III should set a more open dialogue between industry and regulators so that firms have a clearer idea of what good looks like.

More widely, each new regulation requires more transaction data to be reported and a review of the various reporting regimes - MiFID II, SFTR, EMIR, the Short Selling regulation and MAR - would be welcomed to avoid ongoing costly system enhancements, while avoiding duplication and overlap.

MiFID III requires proactive engagement and not passive acceptance of new rules

MiFID II was to date one of the most complex pieces of regulatory change ever implemented in the investment industry. Despite calls for a staggered approach to implementation, it was a big-bang moment and investment firms are still grappling with its after-effects as a result.

Looking ahead, we will instead see gradual implementation of several refinements required to enhance MiFID II’s effectiveness. The three key pillars of “MiFID III” for investor protection will be product intervention, disclosure of inducements and costs and charges—there is recognition that investors still struggle to understand the impact they have on their investments.

As we prepare for further regulatory change, it’s important that firms engage in the calls for evidence and any consultation on MiFID II reviews – either directly or via industry associations. There is an opportunity to feedback on what hasn’t worked and ensure the creases are ironed out ahead of the next round of regulatory change.


Michael Horan, head of trading:  

Increased best execution transparency but fixed income market still needs to evolve

The other area where we are seeing more transparency is around best execution and the provision of post trade transaction cost analysis data. Rightly so, the bar was raised in MIFID II and most firms have stepped up to the plate by asking the right questions of their brokers and wealth managers in relation to how and where orders were executed. In terms of evolution, there is certainly more capacity for better post trade transaction cost analysis for Fixed Income over any other asset class. We are seeing more trades ‘on venue’ and we now have in a place a post trade reporting regime. Both of these are showing real benefits, as we never really had them before. Fixed Income was incredibly opaque and fragmented, but over the last two years we have come on leaps and bounds in that regard. However, we aren’t there yet. It’s still a challenge for the market in agreeing upon a central guide touch price that we can all agree on as the proper reference data to be of analytical use for Best Execution, and this is due to the absence of a CLOB (Central Limit Order Book) in bonds. Further, the touch prices that we do see are still indicative in nature to a certain degree and rarely the real price to execute orders at. When we talk about the consolidated tape, it is in Fixed Income trading where it is needed the most.

The annual RTS 28 and 65(6) disclosures are proving to be useful, as we never had this type of insight before, especially when in the area of pre-broker selection. Now, firms and end investors have a useful window into firms’ execution counterparty profiles for each asset class. RTS 28 disclosures are a big piece of work for firms, but this should get easier over time as we get used to producing them, and that in itself will improve quality.

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