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It is Autumn and the leaves begin to fall…

[fa icon="calendar"] 11-Oct-2017 14:36:41 / by David Woolcock

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Some leaves have already fallen as we progress into the dark months of autumn and these come from ESMA in the form of some answers in the Q&A series. They are intended to shed some light in these dark months to the thorny issue of the coming winter of MiFID II on the 3rd of January 2018. Let us look at the two most relevant topics it contains for the readers of my blogs – Best Execution and recording of telephone conversations and electronic communications 

First up is Best Execution with confirmation that the requirement for “sufficient” steps is a higher bar for compliance than “reasonable” steps. It is noted that this is “likely to involve the strengthening of front-office accountability and systems and controls according to which firms will ensure that their detection capabilities are able to identify any potential deficiencies. MiFID II imposes an explicit requirement on firms to ensure they explicitly check external market data for OTC products  

It was with this in mind that the Eurobase Regulatory Reporter (ERR) was built to have independent benchmarks running through all orders and transactions so that checks could be undertaken on a systematic basis as required in the Q&A. As it states – Delegated Regulation requires firms to check the fairness of the price proposed to the client when executing orders or taking decisions to deal in OTC products, including bespoke products, by gathering market data used in the estimation of the price of such products and, where possible, by comparing with similar or comparable products.”  

We also get clarification that the ex-ante check by firms should examine the pre-trade checks and processes as part of the best execution monitoring. To evidence this you need the records and documentation in place. This lends itself to the holistic data-mart that we have imbedded in the ERR. This completes the front to back view of a transaction that is needed starting with the fairness of the price through to being able to evidence compliance with the firms execution policy. This will be especially useful for firms that select only one execution venue, as it will evidence the ability to obtain, consistently, the best results for their clients. 

In addition, being able to manage “mark-ups” within the same platform to ensure consistency fairness and appropriateness is a definite advantage. I noted in my blog “A timely review of the Treasury Management System against the required standard may yield some unexpected gaps!” the crossover between MiFID II and the Global Code of Conduct. As I wrote in July “In promoting fairness and transparency towards clients by Banks, careful consideration needs to be given in the application of systemically arrived at Mark Up on trades. This must include documenting and publishing a set of disclosures that allows a Client to understand the calculation of a fair and reasonable Mark Up and identifies the determining factors used.” 

Next, the Q&A deals with the issue of monitoring relevant conversations and electronic communications and confirms my observations in the blog entitled – “ACI Dublin – Voice trading under MiFID II and No Free Pass for Spot FX”. In answer 3 to Question 3, we find the clear statement that –  

The monitoring of records of relevant telephone conversations and electronic communications is necessary to assist the firm in ensuring that it is meeting the recording requirements and also adhering to its wider regulatory obligations under MiFID II. For example, it will assist the firm in meeting its wider regulatory obligations which include but are not limited to having policies and procedures in place in respect of its client order handling, best execution, own account dealing obligations and the deterrence and detection of market abuse.  

As I stated in the blog a hybrid model gives huge advantages and is what drove our thinking in the design of the ERR. As I wrote in May this hybrid model fully meets this requirement - “This with a full audit trail, a link to the conversation on the ticket and additionally you have met the requirement to include all quotes whether successful or not.” This is especially critical given ESMA’s view that firms need “to record the entirety of telephone conversations and electronic communications. This is because it is impossible to appreciate upfront whether the conversation will lead to the conclusion of a transaction.” In other words, you must record all relevant conversations and electronic communications from start to end for any that relate to a potential order, quote or transaction. 

I will be moderating a panel next week at the ACI Square Mile Debate, that will include Edwin Schooling Latter, Head of Market Policy at the FCA, which will be a good opportunity to speak to the Banking team here at Eurobase 

So why not err on the side of caution and call us to discuss our ERR – the Eurobase Regulatory Reporter platform! 

Topics: Banking, Blog, Regulation, Compliance

David Woolcock

Written by David Woolcock