For many Asian companies, Europe’s MiFID II directive will have a major impact. From rules governing best execution to research unbundling, here’s what firms need to know.
Asia-based firms with investments and/or ownership of companies outside their own market are highly likely to have exposure and obligations under MiFID II.
The directive has the potential to reshape not just the trading landscape but also product development, client services, human resources and IT infrastructure.
There will be demands on firms over data protection, the speed at which they process information and the way research is priced and paid for.
So ahead of the January 2018 deadline, how will Asian companies respond to the MiFID challenge? Will they see this as an opportunity to build a more standardized environment and provide increased transparency to clients?
Due to the cross-border nature of today’s investment environment, MiFID II will impact firms around the world that deal either directly or indirectly with Europe, including those in Asia, to varying degrees.
Specifically, non-European entities are impacted by what is known as a “Beneficial” or “Exposed” paradigm.
On one hand, they can be beneficial (ultimate) owners of European-based companies or beneficiaries of funds or portfolios of European investments.
On the other, they have “Exposures” through the holding, investing, trading of MiFID II-mandated European assets that are held, bought or sold on European regulated exchanges and platforms.
Investment firms in Asia will face much stricter compliance requirements in order to provide regulators with end-to-end records relating to specific investment decisions, on demand.
This presents a variety of technical challenges that will require significant expertise and time to address.
While some Asian firms have already begun working on making the changes necessary to comply with MiFID II, many still have a long way to go.
Gaining increased importance under MiFID II, the best execution principle requires firms to prove that a product it is recommending does exactly what it is intended to do.
The goal is to ensure that firms have acted in clients’ best interests at all times when making a trade or using a financial instrument on their behalf.
This can be particularly challenging for firms doing business across several Asian countries, where all those involved in a transaction must produce documentation by a specified deadline.
However, countries have varying laws around data protection.
For example, Indonesian law dictates that client data does not leave the country, which will make it difficult to prove best execution.
Asset managers in Asia can expect European fund managers to request best execution reports and possibly even request conformance with “use of dealing commission” rules.
The ability to quickly collect and process large amounts of data as never before will prove critical in meeting these requirements, as will the ability to optimize processes across Asia.
One of the other major provisions under MiFID II involves the unbundling of trading commissions from investment research payments, thus making research provisions distinct from commission payments.
When MiFID II takes effect in 2018, buy-side firms will be required to establish research payment accounts (RPAs) or set up a commission sharing agreement (CSA) with their brokers, rather than paying for research with trading commissions.
This will dramatically change how research is priced and paid for and could also serve as a differentiator for fund managers looking to attract new investors by showing transparency.
It will impact various Asian countries differently, however.
For example, CSAs are not common in Korea or Japan, so brokers in those countries with only local clients won’t see a significant change.
While many companies in Asia will not be directly affected by MiFID II, those that do interact with Europe must be aware how it will impact them and prepare to meet the new requirements.
The ability to harness the increasing amount of available data and use it to understand the market value of certain instruments will in large part determine winners and losers in the post-MiFID II environment.
While the challenges of implementation are numerous, there is also a significant opportunity for Asian firms to provide increased transparency to clients.