HSBC and MiFID II - Where Are They Now?
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At the top of 2018, HSBC predicted the year would see a theme of trading and reporting mechanisms converge across the fixed income and equity trading markets. One of the main drivers of this convergence was set to be the second version of the EU Markets in Financial Instruments Directive - better known as MiFID II - which came into force in January 2018.
While the first version of the directive - implemented in 2007 - was focused almost exclusively on promoting transparency within the equity markets, MiFID II turns the attention onto bonds as well. The International Capital Market Association (ICMA) said at the time that MiFID II will bring "much of the transparency traditional in equity markets to bond trading [and] Europe will go further with bond transparency rules than just about anywhere in the world, including the US."
Now that MiFID II has been in play for several months, it seems a good point to pause for breath and look at some of the impacts it's had on the fixed income market during the year.
When MiFID II was introduced, steps were taken to make sure it didn't cause any immediate tidal waves throughout the industry. Several aspects of the new directive were staggered in their introduction to allow the industry to more comfortably adapt to the new regulatory environment. And for the most part, it has risen to the challenge admirably.
"We are beginning to get to a point where market participants are looking at new innovations and ways of trading," said Global Head of Equities and Co-Head of Equities, ETF, and Fixed Income for Secondary Markets at the London Stock Exchange, Brian Schwieger. "In some ways, the fun is coming back into the business because up until now, resources across the board have been so focused on preparing for MiFID II."
However, the implementation of MiFID II has not been without its bumps in the road - even with an extra year's postponement to allow for adequate preparation. For example, it is arguable whether one of the core goals behind the directive to transfer liquidity from its current position back into lit exchanges has been achieved as was hoped.
So far, volumes are still largely favoring periodic auctions and systematic internalisers, and evidence is yet to emerge of a significant dearth in liquidity.
Ditching broker-crossing networks in favor of systematic internalisers (SIs) was one of the major bones of contention when the first drafts of MiFID II first emerged. There were significant concerns around how those trades would be reported, and how it would be ensured they fell under tick size regulations.
While it is generally agreed that SIs following the same tick size as exchanges will level the playing field and be good for the market, it's important half ticks be allowed for times when there are an odd number in mid-point transactions.
SIs aside, the unbundling of research payments and execution fees has also been a big change to deal with.
"HSBC Global Asset Management has operated itemized research budgets for many years, and thus the process and mechanics for operating detailed budgets was not new to us," said HSBC Global Asset Management Managing Director and Global Head of Market Structure and Execution Strategy, Ian Cohen. "However, the changers to how research is provided, consumed and paid for were and continue to be significant. Possibly second to this in terms of significant change has been the industrialization of post trade monitoring of best execution, which in the case of HSBC Global Asset Management means daily monitoring of every single trade."
It seems, despite some reservations, MiFID II is off to a promising start. There are certainly many bugs still left to iron out, and many people who remain unconvinced. But, as the market becomes more familiar with the details of the directive as it assimilates into fixed income trading, it seems highly likely it will largely be a boon for the industry.
You can hear HSBC Asset Management's Head of Emerging Markets Credit Research, Christina Ronac, speak at Fixed Income Leaders Summit: Emerging Markets 2019, taking place in March at The Ritz-Carlton Westchester, White Plains, NY
Download the agenda today for more information and insights.