Tony Freeman, the DTCC’s executive director for industry relations, says that industry participants will need to restructure middle- and back-office systems as they race to meet the January deadline.
Tony Freeman, executive director, industry relations, DTCC
Although MiFID II is only four weeks away, buy- and sell-side firms are at different stages of preparation. For many, the goal is to cross the finish line on Jan. 3, 2018, but then to spend the rest of the year fine-tuning their systems and processes.
“One of the unknowns is how many people are really ready,” says Tony Freeman, DTCC executive director, industry relations. “There are many studies and viewpoints out there. But there is no centrally available database of the level of preparedness. However, I think there will be a period of regulatory forbearance as buy- and sell-side firms adapt their systems and processes.”
From a post-trade perspective, Freeman notes that securities firms will have to restructure their middle- and back-office systems to comply with the changes across three main areas: derivatives trading; the unbundling of research from execution; and the adoption of Legal Entity Identifiers (LEIs), 20-character, alpha-numeric code that uniquely identifies legally distinct entities that engage in multiple kinds of financial transactions.
However, it is not just about the firms within the E.U. but also those outside due to the extra-territorial reach of MiFID II. “Asian and North American firms who operate in Europe will also be impacted,” Freeman says.
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Take the separation of research and execution. Global firms that have a base in Europe will fall under the remit and will have to manage a research budget either using a research payment account (RPA) or pay out of their own pockets.
“Unbundling is one of the most challenging and fundamental changes and the full impact will not be seen for a couple of years,” Freeman says. “It has taken the buy side longer than anticipated to decide which model — P&L or RPA — to adopt, and there are still many firms across Europe and outside of it that are not ready. Regardless of the chosen model, the operational changes are intense in terms of setting up and monitoring the payments.”
The same is true of LEIs. Under the so-called “no LEI, no trade” rule, asset management firms subject to MiFID II transaction reporting obligations will need to have LEIs to execute and process a trade across all asset classes.
Studies have shown that in October, the total number of LEIs issued was 730,215, up from 566,596 in mid-September, indicating a significant surge in the fourth quarter so far. Breaking the figures down globally, Europe was out in front with 67 percent although this is not surprising given the context of the European regulation. The Americas and Asia Pacific region though were trailing behind at 29 percent and 4 percent uptake, respectively.
“Asian firms in general are behind the curve,” Freeman adds. “Some buy-side firms are reluctant to disclose clients or do not realize that they will not be able to trade without an LEI.”
Freeman notes, though, that while the regulation will not impact them directly, if a firm executes a trade, for example, with an Asian branch of an E.U.-based company and the transaction is booked back to the parent E.U. firm, then post-trade processing would be subject to the obligations.
At the DTCC, the London-based Freeman oversees the DTCC’s Regional Advisory Councils in North America, Europe and Asia-Pacific. He also manages the DTCC’s relationships with trade associations, industry committees and market infrastructures, officials add.
