Asset managers lagging on MiFID II preparations, says PwC

LegalOperational RiskRegulation
19 Sep, 2012

MiFID II - more work for compliance executives

Asset managers, including hedge funds, appear to be lagging behind broker dealers, retail banks and private banks in their preparations for MiFID II, according to a survey by PwC.

While 79% of asset managers have raised (or intend to raise) internal awareness about MiFID II’s technical requirements, very few have initiated any plans for further analyses on what it will mean commercially and operationally for their businesses.

“The lack of preparation to date among asset managers is down to several factors,” said Munib Ali, director at PwC. “Managers are already facing a barrage of regulation including AIFMD, FATCA and Ucits IV and to date have put most of their resources into ensuring they will be compliant with those rules rather than MiFID II. These rules, unlike MiFID II have clearer or earlier deadlines, hence why managers are devoting more resources to them. Regulators hope to implement MiFID II from 2014 but realistically we think it could be as late as 2015,” he added.

MiFID II aims to bring transparency into the normally opaque world of high frequency trading and algorithmic trading platforms, which could force quant-based hedge funds to report to regulators the nature and processes behind their strategies - some managers are alarmed their proprietary data could find itself in the public domain if it is reported to regulators. It would also require these firms to provide liquidity throughout the trading day.

"Policymakers are debating these controversial provisions and we shall not get full details on what they decide until 2013 or 2014. Regulators will need to consider the potential impact on liquidity in the market from such provisions, and also the costs versus benefits of requiring the submission of details on algo strategies,” commented Ali.

The PwC report said MiFID II’s provisions on algorithmic trading could result in some asset managers rethinking their strategies.

Some have criticised regulators for failing to distinguish between algorithmic traders and high-frequency traders. “This is something regulators are again reviewing. They are working on making the definitions in the proposals more specific as they do not want to have any unintended activities captured,” said Ali.  “However, what is not in doubt is that regulators are going to demand tougher risk management and controls at firms with high frequency trading platforms,” he added.

Again, the exact nature of what these internal controls will be remains unknown. Industry groups including the Managed Funds Association (MFA) have urged regulators to impose tougher controls on high frequency trading, particularly in light of events at Knight Capital which lost $450 million when its new computer system spectacularly malfunctioned sending errant orders to market.

“Managers should begin undertaking scenario analysis in regards to the regulation, particularly in terms of what MiFID II might mean for their strategy, and in areas of technology and IT where the impacts will be very significant and costly,” highlighted Ali.

Managed Funds AssociationMiFID IIPwC