Samuel Riding, Regulation Asia, June 22, 2016

Asia-based FI’s should stay focused on the EU Directive despite confirmation of 1-year delay.

Despite the well-publicised delay to implementation of MiFID II (the second Markets in Financial Instruments Directive), which was officially confirmed by the European Union Council last week (17 June), Asia-based financial institutions would be well advised not to lose focus on how it will impact their business in the region. Regulation Asia spoke to Sia Partners, which is currently working on a MiFID II project with a G-SIB (Global Systemically Important Bank), about some of major factors that should be taken into consideration.

Regulation Asia: What is the major impact of MiFID II on Asia-based FIs?

Sia Partners: Asia-based financial institutions conducting business with European counterparts or on European trading venues realise MiFID II will impact their activities, but so far extra-territorial impacts are still being assessed. The compliance departments of EU-based firms could ask Asian counterparties to change how they do business in order to comply with the rules.

RA: How complex is achieving best execution in Asia given the different jurisdictions’ pace of development and other factors?

SP: The comprehensive definition of best execution is not new per se. It was there in MiFID I and some local regulations or industry guidelines, but it has not been the main point of focus until now. MiFID II has reiterated its importance.

The issues will be specific for each type of client you want to address. MiFID II requires brokers to inform their clients of the top five execution platforms used per type of financial instrument. To be relevant, such analysis must be personalised for each type of client and it will require brokers to be able to process data received from execution venues and to assess the quality of execution on each platform.

The capacity to capture and quickly process a very large amount of data will be critical, and is not necessarily already in place for the kind of details MiFID II requires. The extent of the data required is something new, and there will be a need to rationalise and optimise processes across Asia to meet the requirements.

Challenges will be proportionate to the complexity of the organisation’s trading ecosystem. Market fragmentation in Asia may make it more difficult to capture, process and report data within the required timeframe.

RA: Which countries in the region are best placed to deal with the requirements?

SP: Because of the regulatory fragmentation in Asia you cannot fully enforce the harmonisation of systems and processes. Potentially it makes things more difficult in areas such as data protection, where client information has to remain within a country (e.g. Indonesia), which obviously could prove a problem with best execution. Clearly there will be some arbitrage.

Establishing cross-border client relationships will have some advantages, but also bring some challenges. The immediate challenge will be that by establishing these relationships, for instance by starting to service Asian clients on European markets, you open the door to wider application of MiFID. The number of obligations will grow. At the same time, it will be an opportunity to develop something more standardised within Asia.

RA: What tools and practices can be used to achieve cross-market best execution?

SP:Financial institutions are still trying to figure out how to meet the new obligations. Many institutions are still at the assessment and design phase. We have observed an initial focus on tools to process and publish data received by trading venues but there is a growing attention to the enhancement of best execution criteria and the operational upgrades required to provide evidence of best execution.

Adequately calibrating best execution criteria in automated order routing algorithms is not an easy exercise, but it is critical. Approaches primarily focusing on execution costs can lead to unfavourable outcomes for the end clients.

RA: Are global players able to map their existing processes onto APAC jurisdictions, or do they need to start from scratch?

SP: Records and audit trails have to be consistent with the best execution details they have to provide to clients. Regulatory fragmentation and potential regulatory conflicts could be perceived as clear issues for MiFID II but global players already have experience in implementing regulations with extra-territorial reach, such as Dodd Frank or EMIR (the European Market Infrastructure Regulation). They should be able to leverage their existing functional architecture and liaise with European counterparts to coordinate and facilitate local implementation.

RA: What are the key challenges for purely regional players looking to build up sales into ‘more established’ markets?

SP: Looking to target Europe will be a challenge because institutions will have to assess the impacts on their systems and processes, and many regional players do not yet have MiFID II experts in their teams to do this. Some will have to go through the MiFID II regulation and start to establish best practices from scratch.

MiFID II could also have an impact on banks’ booking strategies. On one hand, banks have to factor MiFID II considerations when reviewing their booking models. On the other hand, MiFID II could increase the reluctance of some clients to be booked in central hubs in Europe to limit the perceived regulatory burden. We heard of this initially in relation to Dodd Frank and similar questions are likely to be raised about MiFID II. Its impact on Asia market participants is still being assessed. The industry is not yet at the stage of having a complete view and most banks are undertaking assessments of how their business will be impacted.


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