Firms doubt benefits of EU Mifid best execution reform

Esma proposal retains unpopular aggregated reporting; bankers want more cost-benefit analysis

Esma: doubts remain over doubts its reports will provide investors with relevant information

Photo: Esma

Proposed reforms to European rules requiring investment firms to demonstrate to clients they are getting the best possible execution on trades may not be worth the effort, bankers warn.

“I’m not convinced you will ever be able to produce something that works for everybody,” said Rachel Cockshutt, head of regulatory change in Europe at the Royal Bank of Canada. “And ultimately, yes, there has been a cost burden to firms of producing these things to date, but there’s also a cost burden of implementing changes to those requirements.”

Cockshutt was speaking during a virtual conference hosted on October 8 by the Association for Financial Markets in Europe (Afme).

The rules that form part of the second Markets in Financial Instruments Directive’s best execution provisions have failed to provide information relevant to investors.

On February 27, amendments to Mifid II came into force suspending for two years the need for trading venues and banks deemed systematic internalisers to publish quarterly best execution reports. The amendments require the European Commission to submit a report on the adequacy of the regime to the European Parliament and Council of the EU by February 28, 2022.

To that end, the European Securities and Markets Authority (Esma) published a consultation on September 24, with draft proposals amending both the reports that trading venues and SIs must publish, and annual reports all firms registered as investment firms under Mifid II must disclose. The consultation closes for comments on December 23.

But there are still doubts the reports will provide investors with relevant information, leading bankers to ask whether the burden of the rule is commensurate with the benefits investors may receive from it.

“The cost-benefit analysis runs to about two pages, and there is no discussion in there of what Esma has done by way of research to understand what it is that our buy-side clients and their underlying retail investors actually want or need from the data,” said Clare Jenkinson, co-head of European regulatory change and advisory at HSBC for markets and securities services compliance.

There’s no analysis of the extent and impact on sell-side firms [from these proposals]

Clare Jenkinson, HSBC

Jenkinson, who was also speaking at the Afme conference, continued: “I think it would have been ideal if Esma had taken that step back and done some investigation as to what it is that those sets of clients who are expected to consume this data actually need.”

“There’s also no analysis of the extent and impact on sell-side firms [from these proposals],” said Jenkinson.

Within the consultation, Esma’s cost-benefit analysis states that the proposals will provide a more “focused” overview of the execution quality from venues, while making annual reports more user-friendly.

A spokesperson for Esma emphasises to Risk.net that the consultation is aimed at “facilitating and reducing the flow of the reporting requirements in order to make the reports overall less burdensome and more effective and facilitate their use by stakeholders.”

The spokesperson also points out that this is only the first step in the process, designed to solicit “technical inputs” that can then be used by the EC to draft its own amendments to Mifid II, if any.

Happy to see you go

Martin Parkes, a managing director at BlackRock, told the Afme event that the aggregated data typical in best execution reports from trading venues and systematic internalisers is inadequate to assess the nuances in their clients’ investment strategies and how best execution is achieved. This aggregated data reporting has been maintained in Esma’s consultation. The reports are known in regulatory circles by the specific title of the rule that mandates them: regulatory technical standard 27.

“The type of aggregated data that we get in the RTS 27 [reports] doesn’t really provide incremental benefits at the moment,” said Parkes.

The Financial Conduct Authority had outlined its plans to remove the best execution reporting obligation within a consultation published on April 28 this year.

“We would be sort of fairly relaxed if the EU authorities had moved the same ways as the FCA had and abandoned the production of those article 27 reports,” said Parkes of BlackRock.

Cockshutt of RBC said banks are likely replicate infrastructure across their European operations, so the benefits of the UK removing the best execution obligation would be diluted if the EU retains its own requirements. She said different requirements would create “added complexity” for investment firms.