[ M I F I D
I I
|
F X ]
T
he foreign exchange (FX)
market is unique among
asset classes – largely still
traded on an over-the-counter
(OTC) basis, it is generally more
liquid and short-dated than other
OTC products. FX instruments
may pose less risk than credit and
“There are a lot of moving parts to
this process and we have a big team
working on MiFID II.”
LEE SANDERS, HEAD OF FX EXECUTION,
AXA INVESTMENT MANAGERS
interest rate derivatives, but they
will nonetheless be swept into
MiFID II, and European currency
managers therefore need to be
ready to meet their obligations
from January 2018.
“There are a lot of moving parts
to this process and we have a big
team working on MiFID II,” says
Lee Sanders, head of FX execution
at AXA Investment Managers.
“We are in dialogue with all of
the platforms we use in order to
better determine where they will,
or think they will, be placed in the
new framework.”
Among the complex rules
enshrined in MiFID II and its
associated regulation – MiFIR -
one of the most well-known is the
requirement for investment firms
to obtain “the best possible result
for their clients” when executing
orders – a practice commonly
known as best execution.
MiFID II raises the bar on the
original 2007 directive by requiring
all “sufficient” steps be taken to
ensure best execution, rather than
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TheTrade
Winter 2017
simply all “reasonable” steps. That might seem a trivial
change, but FX market participants have been wres-
tling with the challenge of how to prove sufficiency
when the necessary data and analysis is often scarce.
Transaction cost analysis (TCA) has long been used
in the equity market to monitor and prove best execu-
tion, but it has been less quickly adopted in FX, largely
due to the absence of consolidated, reliable benchmark
data. Under MiFID II, firms are required to take into
account price, costs, speed, likelihood of execution
and settlement, size, nature or any other consideration
relevant to the execution of the order. Sophisticated
TCA is essential if this is to be done properly.
Buy-side trading desks need access to detailed and
reliable trade reports to prove that best execution has
been achieved. BestX, a London-based technology
company that specialises in the delivery of pre- and
post-trade TCA, saw a surge in business as firms
prepared to road-test the service ahead of the January
deadline.
“Many of the larger institutions are now fairly well
advanced in their preparations and are planning a dry
run for their reporting and TCA processes in Q4,” says
Pete Eggleston, founder and director of BestX. “For
those firms that haven’t yet made their system choices,
there will be a lot more work to do to get everything
tested, so it could be very tight to be live in time for
January.”
Different interpretations
While the MiFID II text is reasonably clear about the
high-level objectives of best execution, there have
been calls for greater clarity about exactly what kind
of TCA reports are needed. For example, the regu-
latory technical standards require investment firms
to publish their top five execution venues in terms
of trading volumes for all executed client orders, but
even this summary report is not straightforward.
“There is definitely still a lot of textual interpretation
required,” adds Eggleston. “If algorithmic execution
tools are used, for example, does the buy-side firm
need to produce a top-five report on the venues those
algos execute on, or is it the responsibility of the sell-
side algo provider to do that? There will inevitably be
different interpretations and not much standardisation
in reporting at the start.”