By Jeffrey O. Himstreet, corporate counsel, PGIM fixed income law, PGIM Fixed Income
Parts 1 and 2 of this blog, for Financial Technologies Forum in anticipation of their upcoming conference, Navigating the Maze of MiFID II, and our panel “New Rules for Fixed Income,” focused on the MiFID II rules relating to reporting and research unbundling and their effects on fixed income managers. This Part 3 will turn its attention to the other main constituency of MiFID II – regulators — with a discussion of the best execution and recordkeeping (including tape recording) requirements. These topics and more will be discussed on our afternoon panel on September 18, 2017.
Transparency to the Public – Best Execution. Both MiFID (expressly) and the Advisers Act (implicitly, as part of an adviser’s fiduciary duties) impose a best execution obligation on investment managers, and fixed Income managers thus have been obligated to seek best execution for decades. These obligations would be enhanced and specified with greater detail under MiFID II in several respects. Managers subject to MiFID II must now take “all sufficient steps” (a seemingly higher standard vs. the current “all reasonable steps”) to obtain best execution for client transactions. MIFID II also requires firms to disclose publicly the top 5 trading venues, as well as specific information relating to the quality of transactions. Identifying the top 5 venues will require extracting trade data from several different systems and categorizing the data and measuring trading volume. UK regulators have been concerned that managers’ execution policies are inadequate, and MiFID II now requires firms to ensure that their execution policies are clear and sufficiently detailed, and firms must also substantiate their best execution efforts to regulators, when requested, and clients.
Transparency to Regulators. MiFID-licensed advisers also are subject to recordkeeping enhancements of MiFID II, which require advisers to maintain specific records relating to (a) communications and other information provided to clients; (b) investment management agreements; (c) suitability records; (d) handling of client orders; (e) client orders; (f) transactions and order processing. Recordkeeping periods vary by member state (but are 5 years in the UK) and must be
“The real cost burden of MiFID II’s recordkeeping rules lies in the requirement that firms record telephone calls for person responsible for bringing about securities transactions.”
accessible and available to regulators, akin to the “promptly” standard in the US and the Advisers Act conditions for the use of electronic storage media imposed by Rule 204-2(g).
The real cost burden of MiFID II’s recordkeeping rules lies in the requirement that firms record telephone calls for person responsible for bringing about securities transactions. No longer able to rely on executing broker-dealers to fulfill the MiFID I obligations on the manager’s behalf, MiFID II firms will be required to (if they haven’t already) invest in the technology not only to record the calls, but also to retrieve them (the granularity of the retrieval requirements is uncertain) and perform supervisory monitoring of them, much like emails. Whose calls must be recorded? Those that relate to transmission and execution of client orders, and those that are intended to result in transactions. For fixed income firms, portfolio managers and traders appear squarely within scope, but what of certain operations or client services professionals that may have conversations relating to client transactions? These are fact-specific inquiries for each firm to undertake pursuant to the taping policies that they must now develop and maintain.
I look forward to discussing these issues and more at our panel on September 18.
To meet Jeff Himstreet and learn more about this subject, please attend FTF’s Navigating the Maze of MiFID II conference, September 18 in New York.
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