Mifid II regime shines light on trading relations
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Fund managers in Europe may face tough conversations with some brokers this week after a regulatory drive to publicly disclose more information on their trading relationships begins.
From Monday, asset managers must show the top five brokers they have used for trading over a calendar year, for each class of financial instrument.
They must also show they are getting the best prices on their share, bond and derivative deals. Brokers must show the venues they used to execute the trades. The first reports will reflect 2017 activity.
The transparency, likely to delight some brokers and annoy others, is one of the more public examples of radical new European rules designed to restore consumers’ faith in markets after the financial crisis.
Among the biggest changes under the Mifid II regime, brokers can no longer “bundle” investment research with the fee they charge asset managers for executing trades.
“The information is commercially very interesting because it will enable the market to see which brokers are being used by which asset managers,” says Nick Bayley, a former regulator and a managing director at Duff & Phelps, a corporate finance adviser.
For example, the Henderson Global Investors annual report said a Henderson entity in Singapore was its third-largest broker for share trading, after Credit Suisse and Goldman Sachs. There was “no commercial incentive” to route orders via different Henderson entities, the fund manager noted.
Mr Bayley said the reports would also highlight “questionable” market practices, such as institutions using only one broker in certain asset classes.
Many executives are sceptical of the value of the reports, as the data are not standardised nor sufficiently detailed to be useful to brokers. European regulators have also acknowledged that many institutions may not be able to fully report their data.
“The venue reports are going to be largely pretty useless. I’m sure all venues are going to show they’re the best venue in the market,” said Mark Hemsley, chief executive of Cboe Global Markets Europe, the stock exchange. The market would still rely on brokers for in-depth information, he said.
Nevertheless, brokers are trying to boost their market shares in Europe as fund managers adjust to the new Mifid regime.
A report last month by Liquidmetrix, a consultancy, found Mifid had little effect on the liquidity in FTSE 100 shares. To improve it, executives say larger brokers are using their balance sheets to take customers’ orders, and work them into the market over time.
But asset managers are wary that Mifid II is still in its infancy. “Liquidity seems to turn up in places you don’t expect with brokers you don’t expect. It’d be wrong of us, based on the market cap of the stocks we cover, to even think about reducing lists right now,” Simon Steward, head of European equity trading at Capital Group, told a conference in Paris last week.
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