MiFID2 For U.S. Firms: Key Questions Answered

Feb 27 2017 | 5:54pm ET

Editor’s note: The January 2018 deadline for implementation of the EU’s mammoth MiFID2 regulations is fast approaching, and with it growing concern about what exactly it means for U.S. asset managers, broker dealers, and investors. Two core issues – reporting and research – are dominating the conversation, says Adam Jacobs-Dean and Michelle Noyes of AIMA, and U.S.-based stakeholders should both understand and prepare for the onset of very comprehensive requirements overhauling key aspects of the global securities industry.


MiFID2 for U.S. firms: Key Questions Answered
By Adam Jacobs-Dean, Global Head of Markets Regulation, and Michelle Noyes, COO 

What exactly is MiFID2? 

The Markets in Financial Instruments Directive (MiFID) is the cornerstone of European securities law: it regulates trading venues and intermediaries that provide services to clients around shares, bonds, units in collective investment schemes and derivatives. MiFID was subject to a drawn-out post-crisis overhaul by European policymakers, with the revised MiFID2 standards set to come into effect in January 2018. MiFID2 goes much further than the original MiFID: it bolsters the transparency standards for venue-traded instruments in the EU (including bonds and swaps), beefs up investor protection standards, implements the G20 mandate on venue trading of swaps, introduces position limits for commodity futures, and broadens the scope of what has to be reported to regulators.

Why should U.S. managers care about MiFID2? 

For U.S. managers with an EU subadvisor, the EU subadvisor will typically be regulated as a MiFID ‘investment firm’, so the EU entity will need to overhaul its systems and processes to achieve compliance with the new regime. But even managers who don’t have a European entity are likely to feel the effect of MiFID2 if they trade on European markets or with European brokers: they will be subject to EU commodities position limits, which apply extraterritorially. Their brokers will need to perform additional due diligence on them in order to be able to provide them with market access. They will need to take account of the changes to the European trading landscape, which mean a shift of OTC trading onto venue and a big increase in the data that gets published to the market – including for bonds and swaps. The applicability of MiFID2 is not really about whether you have EU investors in your funds, it’s about whether you trade with European counterparties. 

What are people most concerned about when it comes to MiFID2? 

At this stage, two issues tend to dominate the debate for European managers: reporting and payment for research. On the reporting side, there are a host of MiFID2 reporting requirements that will impact firms established in the EU. These include requirements to report to regulators to enable them to monitor for market abuse. They also include reporting to the market on executed trades to improve competition and strengthen the price formation process (at least that is the theory). Both imply significant systems investment by the buy-side and offer limited scope to rely on the sell-side to fulfil the obligations. As far as payment for research is concerned, MiFID2 enshrines a model where investment managers need to pay separately for research and execution services: no more getting these services on a fully bundled basis. There are still major uncertainties around this move: how will it impact fixed income markets if firms pay separately for fixed income research – clearly execution spreads are not going to tighten over night? And how will this square with US law if US broker-dealers can’t receive hard dollar payments without triggering the requirement to register under the Advisers Act? 

How far have firms got with their MiFID2 implementation work? 

For firms in the EU, most have been reluctant to move ahead too swiftly with implementation, not wanting to invest time and effort in working out how to apply the rules only to find that they then get delayed or that industry consensus about what the rules mean heads in a different direction. But most firms are now starting to get to grips with their MiFID2 work and are in the weeds of systems changes to meet enhanced reporting standards. They’re also having conversations with brokers and vendors about what solutions they can provide to lessen the operational burden. 

Won’t the regulators end up delaying the rules again? 

If you’re crossing your fingers for a delay in the rules, you’ll be disappointed. The original go-live was set at January 2017 and that was indeed pushed back to January 2018, but this was primarily driven by regulators needing more time for their own implementation work, not by concerns about the burden for firms associated with the new rules. Europe doesn’t have anything comparable to ‘no action’ relief, so firms need to view the January 2018 deadline as a hard cut-off for getting themselves in shape. In case you are wondering, Brexit won’t prompt any delays either. The Financial Conduct Authority have made it abundantly clear that they expect firms to be in compliance, regardless of the UK’s decision to leave the EU. 

What is AIMA doing on MiFID2? 

We have a series of working groups devoted to MiFID2, with the goal of enabling members to share perspectives on their implementation work and to feed into regulators to try and shape the aspects of MiFID2 that are still up for debate. Most importantly, we have also published a comprehensive Guide to MiFID2 for our members, covering all of the key aspects of the rules and providing guidance on how to achieve compliance. It runs to over 100 pages, but is very accessible and much more user-friendly than the 1000s of pages of legislation that it condenses! 

*AIMA recently published a Guide to MiFID2 for its members. To download the guide, visit the MiFID2 section of the AIMA.

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