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MiFID II: Five Months On – a Q&A with Matthew Chapman

Jun 6, 2018

Topics: Compliance | FCA | MiFID II |

MiFID II may have gone live five months ago, but the effects of the European Union’s ‎long-anticipated directive are still being felt by financial firms. In its recent business plan for 2018/19, the FCA acknowledged that the newly-implemented regulations have created challenges for both individual firms and markets.

We speak with Matthew Chapman, one of our senior compliance consultants, to get a better picture of the regulator’s current stance on MiFID II and understand why firms must make sure their ongoing arrangements remain aligned with regulatory expectations.

Cordium: MiFID II has now been in effect for five months, is this not now ‘old news’?
Matthew: Sadly not. After gruelling, expensive implementation projects, many firms may by now have hoped to draw a line under MiFID II. But the directive is a recurring theme in the FCA’s Business Plan for 2018/19. Indications are that scrutiny levels are set to rise.

Q. So what is the regulator’s current stance on MiFID II?
A. Earlier in the year, the FCA stated that it was going to “allow the market time to evolve,” and there’s been a lot of industry discussion about “forbearance”. However, the business plan now makes it clear that all firms need to ensure that their MiFID II implementation programmes are complete and that the FCA will “closely monitor how well firms are complying with these new requirements.”

If forbearance ever really existed, then I feel that it is now over. ‘Best endeavours’ are not going to be enough. Even if enforcement action is not an immediate threat, the FCA is most certainly watching, and if does not like what it is seeing then firms may find themselves under scrutiny later in the year.

Q. Does the FCA give any indication as to where it will focus its supervision and enforcement efforts for 2018/19?
A. It does, and they are very much consistent with expectations. It states that there will be a particular focus on four areas:

  • transaction reporting;
  • best execution;
  • payment for research; and
  • high frequency and algorithmic trading.

Q. What does the regulator say firms should be considering when it comes to ‘Transaction Reporting’?
A. Transaction reporting is the cornerstone of the FCA’s continued focus on market abuse detection. The regulator places considerable reliance on the completeness and accuracy of a firms’ reporting.

If end-to-end data reconciliations have not yet been performed, then they should be scheduled sooner rather than later to avoid a growing backlog of incorrect reports. And indeed, to identify any problems before the regulator does.  Firms trading fixed income, commodities and non-standard derivatives face the greatest scrutiny.

Now that these instruments are generally in scope of transaction reporting, the FCA will focus its market abuse monitoring in these areas, having not been able to do so meaningfully before.

Q. What does the business plan focus on when it comes to Best Execution?
A. Best Execution has been a source of enduring regulatory dissatisfaction. But the FCA now has greater visibility than ever before of firms’ best execution arrangements via RTS 28 disclosures. The regulator has made it clear that ensuring trading practice remains consistent with updated best execution policies is fundamental.

Monitoring will be complicated by the publication of RTS 27 data in June 2018. This was already set to be a huge challenge for firms to consume, make sense of, and make effective use of the vast volumes of new data.
But this has now been exacerbated by ESMA’s recent update to the investor protection Q&A released last week. The updates included clarification around the definition of “other liquidity providers” – which will be subject to the RTS 27 reporting requirement.

Q. What does this clarification mean for financial firms?
A. ESMA can impose the RTS 27 requirements on any firm where the provision of liquidity (regardless of a willingness to enter into a transaction to buy or sell at all times) is central to the business model. This, in turn, is likely to mean that there will be even more data for firms to digest.

So firms will need to be able to report meaningfully on their usage of quarterly RTS 27 data in their next RTS 28 reports (due April 2019). They must have a strategy in place for its consumption and analysis in advance of the first RTS 27 publications, and be able to adapt it where necessary over the course of the year.

Q. What does the FCA say about payment for research?
A. Payment for research is another long-standing bugbear for the FCA. The regulator makes it clear that related arrangements are central to firms’ effective management of conflicts of interest. This demonstrates that the amount paid is a fair reflection of the value of services received remains a challenge, so a regular, meaningful evaluation of those services will be critical.

And firms operating Research Payment Accounts will need to keep those arrangements under constant review to ensure that they continue to operate in accordance with the requirements.

Levels of unsolicited research are falling but still remain a problem for many firms. They must ensure that procedures for identifying and stopping receipt of such materials continue to operate effectively.

Q. And how does the regulator’s business plan approach high frequency (‘HFT’) and algorithmic trading?
A. The combination of extensive new rules, ongoing focus on market abuse and the FCA’s championing of FinTech makes high frequency and algorithmic trading an appetising, supervisory target.

Firms operating HFT or algorithmic trading strategies must ensure that there is an effective combination of pre-trade controls and post-trade monitoring to prevent and identify any potentially abusive activity. Firms must make sure that any individuals executing such strategies have the skills and expertise to react to unintended or abusive behaviour by HFT and algorithmic trading systems. In addition, those overseeing this activity must also have sufficient understanding to be able to provide effective challenge.

ESMA’s recent update on MiFID II and MiFIR transparency and reporting also clarified that Direct Electronic Access (‘DEA’) providers are fully responsible for all clients using their access, regardless of their domicile. Making sure that related arrangements are, and remain, fit for purpose is essential. Such providers must therefore be sure that it can terminate provision of services where the conduct of the DEA client is reasonably suspected to be abusive.

Q. So when it comes to MiFID II, what would you advise firms to take away from the business plan?
A. Five months after MiFID II implementation day, it’s vital that firms take stock and make sure that arrangements were implemented correctly and are working as intended. Firms should carry out a full, risk-based assessment to gauge the success of their initial implementation and seek advice if there are any concerns or areas of ambiguity. And they need to do this before the FCA reaches any conclusions as a result of its “close monitoring of how well firms are complying with these new requirements.”

Contact us to learn more about our compliance health checks, which provide you with a comprehensive assessment of your firm’s current compliance arrangements. By carrying out a review of your firm’s compliance policies and procedures, we can help you identify any regulatory gaps, failings or weaknesses across your programme.


Matthew Chapman, Senior Consultant Cordium

Matthew is a senior consultant at Cordium, responsible for regulatory implementation projects. He specialises in advising asset management and private equity clients on broader compliance matters. He has extensive experience in the design and delivery of compliance monitoring programmes and regulatory risk assessments.

Previous to Cordium, Matthew was a Compliance Manager at Capital Group, an investment management organization. He also worked as an Internal Auditor at Ignis Asset Management, before gaining experience at Neuberger Berman as Vice President, Compliance. Matthew holds a BA (Hons) in Modern Languages from Oxford University and is a Certified Information Systems Auditor.