At this week's Cordium conference in London, the panellists discussed the ins and outs of the European Union's Markets in Financial Instruments Directive. Dark pools, exchange-traded funds, dealing commission, transaction record-keeping, telephone surveillance and gold-plating in general were all on the menu.

On the panel were Michael Hufton of Ingage, which hosts an investment platform, Adam Jacobs of the Alternative Investment Management Association, Arjun Singh-Muchelle, the regulatory supremo at the Investment Association, and Leonard Ng, a lawyer at Sidley Austin. In the chair was Jonathan Wilson, who has written for Compliance Matters before. His firm Cordium, the international compliance consultancy which has also branched into transport and other things, was holding the conference at the Bloomberg building in Moorgate.

The activities with which the directive-to-be proposes to deal include 'dealing on own account' and reception and the transmission of orders. Firms often delegate this last function to others. One of the snags associated with transmission, the panel noted, is that any firm that does not delegate the job still has a residual duty to make the data reasonable and accurate.

Will a Financial Conduct Authority 'enforcement action' be required to change behaviour and nudge firms toward compliance with the onerous reporting requirements in MiFID II when it finally comes into force? One expert thought that many firms would take their obligations seriously from the start. He added that there had already (obviously not on the subject of MiFID II) been "a couple of reporting actions on the sell-side," although the regulator had not taken these against investment managers. Others thought that an enforcement action or two might be required, with one of them adding that he expected the FCA to excercise as much forbearance as it could without stretching the law, "but ultimately enforcement is the most powerful tool they have."

The chairman then asked the huddled masses a question: do you believe that the European Securities and Markets Authority is doing anything useful with the data? They voted 'no' in overwhelming numbers - 70% to 30%.

A panellist noted that ESMA itself keeps repeating - possibly rather unconvincingly - that it is using the reported data for something. He also said that transaction reporting was certainly a cornerstone of the Financial Conduct Authority's strategy to curb market abuse.

The audience then had to answer another question with their electronic voting devices: do you rely on your counterparties for transaction reporting? The answer surprised the chairman.
Yes, for all transactions: 60.9%
Yes, partially: 22.4%
No, we do it in-house: 16.7%

The panel started its tour of MiFID-related issues with equities and referred to dark pools. Dark pool trading operations allow clients to trade shares while keeping prices private until the deals are completed. They have been criticised for their lack of transparency and the fact that they inhibit the market from pricing securities accurately. US regulations require dark pools and exchanges centres to trade at the best-quoted price, regardless of where the trades are executed. One panellist said: "On the buy side, we don't worry about equities with the exception of the double-volume cap mechanism and how it will function. The mechanism is a very large hammer for a very small nail. At the last count, 24% of Royal Mail is traded in the dark. The regulators wanted to impose a cap to limit the use of dark pools. We don't think it's likely to happen. Going from a dark venue to a fully-lit venue is improbable."

National regulators can waive some of the present directive's requirements. MiFID II's double-volume cap mechanism, according to the EU, is designed to limit the use of reference price waivers and negotiated price waivers (4% per venue cap and 8% global cap) together with a requirement for price improvement at the mid-point for the former. This controversial initiative is a departure from MiFID I. Pre-trade transparency waivers, however, will still be allowed.

If transactions grow larger because of MiFID II, one panellist said, then on the post-trade report, once the information about a trade becomes public it will be likely to shift the price. Another expert countered that this is not to be the case if it is traded in the dark. Another panellist remarked that exchange-traded funds were created to be super-liquid instruments, so they could stand more light.

Once the directive becomes EU law, said one man, "The EU will be the only jurisdiction that will have trade transparency for cash bonds. ESMA has adopted the instrument-by-instrument approach, depending on historical trading activity. Bonds are news-driven, so we don't think a bond's previous trading activity has a bearing on its future. We can't predict news stories. Trying to use history to predict the future is silly but they've chosen it.

Dealing commission

When it came to this topic the panel admitted that it did not know what the final proposals are. It did, however, point to some clues. One panellist said: "The focus is on whether client money can be used to pay for research. We're seeing very clear evidence from managers that they don't think it can. Many of them are saying 'we aren't waiting for delegated acts, we see the direction of travel.' They are therefore paying for corporate access and research out of P&L. They are very concerned about using any sort of client money at all to pay for research. So I think we're going to see a great deal of unbundling. Rates are going to plummet."

Another panellist thought that the most important part of MiFID in respect of dealing commission was the cost of disclosure: "Everybody is comparing you with everything else. That'll drive behavioural change. Some asset managers are already using this as a sales and marketing opportunity." Another panellist, however, thought that this would be of questionable value to the market: "By stopping wasting ½ a percentage point in a 7% world it's OK, but in this world of low returns, it's bad." Another commented: "The FCA has been on this path for a while."

The panel moved on to PS14/7 (an FCA paper entitled "Changes to the use of dealing commission rules" that came out in 2014) and the sorting-out of payments for corporate access. One panellist was sceptical about its efficacy: "That's not changed anything. Corporate access is flawed – it only apples on the buy-side and not sell-side. We all know that corporate broking in the UK is free. Who is paying? It must be the tooth fairy. I suspect there will be mechanisms for client money going into research. MiFID mustn't allow client money to pay for corporate access. Fund managers are really only interested in corporate access, not research, and that's expensive for a fund manager. One house I know of does 6,000 meetings per year and it costs $1,500 a meeting."

The migration away from charging clients for 'research' is gathering pace. One panel member commented: "A lot of fund managers are going onto the front foot and getting ahead of the curve. Some of the big asset managers in the US are going to roll this out too. From a purely marketing perspective, charging the client for research on top is bad. It's a cost of doing business. It's like going to restaurant, paying the bill and being charged for the laundry."

A practitioner in the audience was worried that British 'gold plating' was causing the City trouble as usual: "When the FCA brought in a ban on corporate access, there was uproar. In France it's permitted, and in our other competitor countries. It's a minimum harmonising directive. Different jurisdictinos can have the minimal rules they want or they can gold-plate. It hurts the City as a global research centre. Enhanced CSAs [commission-sharing agreements] are permitted in the directive. We think that clients having transparency over what they pay for is a good thing. Minimal cross-subsidy between funds is a good thing.

"There is no commission market in fixed-income research. If we now have to start paying separately for it, spreads will not narrow, so we're going to have to pay more for the same execution quality. So there should be an exemption for fixed-income research. We support broker unbundling. A lot of brokers are thinking of introducing a rate card."

The FCA reviewed 17 investment firms last year and found that only two had satisfactory processes for handling the allocation of dealing commissions. Bloomberg, the  company that hosted the event, wrote about enhanced CSAs in its 'Tradebook' blog on 16th June last year: "The concept...postulated that asset managers would both set budgets for research consumption and could still use commission for research consumption by employing commission-sharing agreements as a budget-funding mechanism. When the budgeted 'funding' levels were reached, the asset manager would then follow an execution-only rate regime. Initially, the UK government’s apparent policy change, in our opinion, made this the odds-on likely outcome."

Someone asked whether a US manager of a fund in the UK would have to obey the MiFID commission rules. The answer was yes. A panellist added: "First, you won't find a US manager of a UK fund directly. A US manager with a UK affiliate may have a sub-advisor."

The chairman asked the audience of asset managers the question: "Do you plan to pay for investment research from your own P&L and not from client funds regardless of the final outcome of MiFID II?" The ayes won with 54.7%; the noes had a respectable 45.3%.

Another question asked: "If research is to be paid for from P&L will your firm's research spend fall?" The 'yes' camp scored 55.2%; the 'no' camp scored 44.8%.

On the subject of 'best execution,' the responsibility of brokers to execute orders in the most advantageous way for their customers, the chairman asked Leonard Ng whether anything new was on the horizon. He replied: "Best execution is...the text in MiFID II, including the leaked verison, is copied from MiFID I with a few new paragraphs, so it's easy to compare and contrast. There are two new important things that brokers or asset managers are going to have to do.

"Your investment policy will have to be more detailed. Today, there are five classes. In the new world, there are going to be about 20 classes and sub-clases. That's easy enough. It's a descriptive document.

"Also, there's a new requirement. Every year, you'll have to do two things:
(i) publish execution quality; and
(ii) display your top five execution venues if you're a broker or your top five brokers if you're an asset manager.

"You have to describe inducements or conflicts of interest and how you managed them. This is a description of quality. Firms have to publish nine tables full of data for brokers to analyse. The MEPs said that that's a lot of information and they might kick back the RTS (regulatory technical standards that ESMA produces). If you're an asset manager you have to describe the top five brokers you use and the volumes of business you send to them by proportion (so you look at percentages, not the actual figures). This isn't stuff you give the client; you have to publish it on your website for all to see in 'machine readable format.' Firms therefore might say 'I don't want Morgan Stanley to know that data.'"

Transaction record-keeping and telephone taping

In respect of record-keeping, the directive-to-be seems to be fairly benign. One panellist said: "Record-keeping is a problem because you have to record the time of decision making as well as the time of telling your broker. Unfortunately, there are 40 items to consider and you must make a record of these factors 'immediately.' We shall see whether the FCA comes out with any guidance on the subject.

"Currently investment managers are exempted from telephone taping, but the FCA is proposing to take that exemption away. Taping means cost, storage (the current rules say six months, the next rules say seven years). They expect you to monitor the calls. Someone will have to do that. Hopefully everything's in English. Some clever service providers pick up key words. Everyone has three phones -  one private, one internal to the firm and one external to the broker. So will we have to see a move to an automated way? Yes, that's what they seem to be pushing for."

Gold-plating in general

Delegates noted that asset managers were not a homogenous mess. They also noted that the directive-to-be is not applicable to alternative investment fund managers (AIFMs) or Undertakings for Collective Investments in Transferable Securities (UCITS). One noted that EU member-states might add further requirements as they saw fit.

Another delegate said: "The crucial development will be on dealing commissions. To what extent will the delegated acts (rules that ESMA evolves) be consistent with the FCA's guidance? The transaction reporting one is interesting – they are not wedded to the idea that all asset managers should have the same rule-base."

John Griffith-Jones (the chairman of the Financial Conduct Authority) and Tracey McDermott (its acting head) are appearing before the parliamentary Treasury select committee. The chairman asked the panel whether regulation was becoming more 'laissez faire,' i.e. ineffectual. One delegate said: "It is tempting to say that we are seeing change. Wheatley was a champiion of unbundling and 'shoot first, ask questions later.' Is there going to be a softer approach from now on? Maybe."

The audience was asked another question: "Where MiFID II causes your firm to adopt new policies (e.g. dealing commissions) will you roll those new standards out more broadly, or operate with different standards in different places?" The answers were:
Globalise the stands - 72.7%
Different standards - 29.3%.

The idea of 'super equivalence' was therefore the overwhelming winner.

The conversation then passed to the so-called 'elephant in the room' – the question of whether the directive is likely to be delayed. Some commentators - such as Steven Mayall speaking in Hong Kong earlier this month – expected the final details to be settled in a few weeks. One panellist, however, spoke for many when he said: "We assume a year's delay. The final making of IT standards has to take a year, so there has to be a further delay." Another said: "I'd bet money on a delay." The chairman asked whether the delay would be for the entirety of the directive. One of his panellists answered: "Yes, it would have to be for all of it. MiDID is too interconnected." Some thought that EU member states might need an extension of transposition too.

To the question: "What is the status of your MiFID II implementation project?" The audience replied:
On shedule: 18.3%
Behind shcedule: 6.9%
Awaiting the outcome of the delayed proposals: 75%.

The chairman said: "We'll have to wait and see. It's about knowing the final rules rather than knowing the implementation date. When they're known, we'll see a rush."

The final question was the decider. The audience was asked: "MiFID II - is it a judicious update of regulatory framework or gratuitous bureaucracy?" The answer was:
The former: 33.8%
The latter: 66.2%

The chairman rounded off the meeting by saying: "That speaks for itself! We've learnt that while a delay is highly likely, there is still much work to be done, especially in strategic decision making, how you face the markets."