Best Execution in the context of MiFID II and Trading Innovation
City and Financial Global
04 Nov 2015
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Following a 'Peer Review Report' by ESMA in February of this year, the Authority's Chairman Steve Maijoor, commented:
"The overall findings in this report show that the
standard of supervision to ensure the implementation of
MiFID's best execution requirements falls short of its aim of
ensuring that retail investors receive the best outcome when
"It is important that this situation is addressed in the interests of Europe's investors."
The shortcomings of MiFID I should be addressed by MiFID II, but the latter's proposals also generate a number of concerns. For example, MIFID I requires 'sufficient steps' to be taken to achieve best execution rather than 'MIFID I's 'reasonable steps' This sounds tighter but the rules are not so prescriptive that they may not give rise to arbitrage between banks.
There are also issues over 'best execution price', how is it defined between 'clear price level'; 'trader price level' or 'all in price'? How will client clearing really be monitored? It will need a technology solution that can look at a trade months after it has taken place and demonstrate best execution. There is thought to be a lack of clarity about the 'systematic internaliser' and to what benchmark the best execution price is relative.
Other questions have arisen over the definition of 'research' which is wider than the FCA definition. This could affect banks market strategy reports and how they deal with the concept of 'market colour'. Additionally the data requirements and monitoring are tough, for instance, telephone recordings of conversations with clients have to be kept for five years or even longer in some cases.
The effectiveness of the 'double caps' on dark pool trading have been challenged by Markus Ferber, MEP who says they may not be work.
When it comes to HFT, the definition proposed by MiFID II in April is based on the 'four messages per second' metric and is believed by many firms to be relatively light touch. However, they are not off the hook as the PRA has made it clear that HFT will face tougher scrutiny.
The Financial Transaction Tax proposed by the EU Commission has also aroused widespread opposition. Of particular concern to financial institutions is the very broad scope of the proposed tax, its extra-territorial reach and the likely impact of the tax on the financial markets and wider economy.
All these concerns make for a full conference agenda and they will be handled as follows:
- FCA policy and best execution
- MiFID II and best execution: Fulfilling the overarching agreement
- MiFID II and best execution: data and monitoring
- The challenges of implementing MiFID II in relation to best execution
- The impact of new regulation on high frequency and regulatory trading
- The double cap: will it work?
- Transactions tax
- Technology solutions to the problems of dark pool regulation