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Summary of FCA Q&A session with Stephen Hanks

To:         ICMA MiFID II Working Group (MWG) 

ICMA Platform Working Group (PWG)


Re:         ICMA FCA Q&A session with Stephen Hanks – 7 December 2017

[Including: Key takeaways from FCA Roundtable discussion – 14 December 2017 & LEI conference call held with FCA, 4pm – 20th December]


I. Submitted questions for FCA:


1. In the instance that there is no clarification either from the regulators or industry groups on outstanding MiFID II points, what is the best approach firms should take?  


The FCA has a “realistic approach” to MiFID II/R implementation: “we recognise there will be aspects that are less than perfect on 3 January”. If regulators come out with changes, the FCA will be practical in allowing firms to make changes.


The priority on 3 January 2018 is to ensure that firms have the correct permissions for the business they conduct and have made the necessary connections e.g. ARMs, APAs.


To the FCA, MiFID II/R implementation is a process rather than a single event. Furthermore, MiFID II/R is considered a major market event. Expect supervisory calls with firms the first few weeks of January.

2. Please confirm that you would deem it sufficient to confirm compliance with MiFID II if a firm makes certain best efforts assumptions, and clearly documents them until further guidance is provided by regulators or industry groups.


The FCA confirms reasonable assumptions can be deemed as compliant providing there is documentation, evidence and justification as backup. Document assumptions should be backed up with evidence as much as possible.  


FCA enforcement will focus first on those not complying at all, those who are incompetent or those who are purposely ignoring the regulation. They will not be focusing enforcement efforts on firms which have made reasonable assumptions and are doing their best.


Note of caution: FCA will be on the lookout for firms that are ‘backward engineering’ their current business model/workflow.  Firms should not start from “what a firm wants to do” and work backwards in order to justify. Instead, start with the new legislation and its general purpose/aims and work from there.

3. Does an asset manager (or someone else, e.g. the APA) have to apply to the FCA for each specific deferral regime to benefit from them, or are FCA deferrals automatic in some form? Some NCAs have an ‘application’ for deferral process, while the FCA seems to have a ‘qualification’ for deferral process.


Only trading venues are required to apply to the FCA for deferrals. Investment firms trading OTC do not have to apply to the FCA for deferrals. However, they do have to keep records of the deferrals used to show the FCA that their transactions were compliant with FCA policy. 

4. Can an asset manager choose which deferral applies on a trade-by-trade basis? E.g. can certain sovereign trades be applied for deferral with individual price disclosure and other sovereign trades be applied for deferral with price aggregation?


The FCA does not think this is prohibited in the rules. However, Stephen Hanks queried why a firm would want to do this. What is the logic to have one approach for one transaction and another approach for another? Firms should show justification as to why trades are treated differently. 

5. From discussions both internally and externally we, and other firms, are not sure if we do any trading that should be flagged (and linked) as a complex trade in transaction reports. Can the FCA provide any other guidance or examples, of what constitutes a complex trade?


The essential principle according to ESMA guidelines is that a complex trade is where there are transactions in more than one (multiple) instrument and a single price that has been agreed for those transactions. If transactions are priced separately, they are not a complex trade for transaction reporting.

6. Exception Handling – by when do the exceptions have to be handled for Trade reporting. The regulation states best effort basis, can the FCA provide more guidance on the timeframe?
-The question relates to the correction of transactions – in the event that we, or our APA, identified an error in a trade report (for example missing data, incorrect trade information) given that the trade reporting timeframe is within a minute, what is the requirement in terms of timing for reporting the correction? Is ‘best efforts’ sufficient or is there a prescribed timeframe of say 1 hour or end of trading day or something else?


The question refers to the time frame for making corrections in trade reports. The FCA will not provide specific guidance on exact minutes. However, the expectation is that any correction should be made “as quickly/soon as technically possible, after the firm has become aware”.

7. For pure voice trades (OTC non-SI), both the asset manager and the broker will record an arrival time and execution time. How are we to ensure that these timestamps for both parties is the same and accurate? Do you agree that an industry standard should be for the sell side to confirm the arrival and execution time on the phone and then to transmit it via a confirm to the asset manager?


The FCA expectation is that there should be a single timestamp for voice trades. However, the FCA will not get involved in the details as to how the parties of a transaction achieve this. There should be flexibility for the parties to decide.

Note of caution: The FCA stated there could be an issue if it takes a significant time for parties to decide the timestamp.


8. Is the passive/aggressive categorization applicable to plain vanilla cash bonds? Our understanding is that this field is only applicable to transactions carried out through an order book.


This depends on the type of trading. If there is an orderbook the answer is more clear-cut. For other types of trading, the passive/aggressive categorisation could be less relevant. “If you decide it is irrelevant, you do not need to use this categorisation” (leave field blank or n/a). If a firm leaves this field blank or with an n/a, it would be wise to document why.

9. When will the FCA be able to provide us with the decision on equivalence between an MTF & SEF. Based on the existing equivalence arrangement, firms have elected to follow the Dodd-Frank regime and comply with clearing requirements. In the event that there is no equivalence after MiFID II, what is the expectation for firms? (Note: This was addressed in the 22nd November FCA conference call for Trade Associations. However, more information regarding equivalence from the FCA would be welcome.)


The week of the meeting there was news regarding US and DTO (Derivatives Trading Obligation): The US is recognising trading on trading venues in Europe as equivalent for DTO purposes.


The FCA is expecting DTO to go live on 1 Jan 2018 and then trades can be executed both in the EU and equivalent venues in US. However, Stephen Hanks had no news as to whether we will get equivalence decisions in respect of venues in other jurisdictions, other than US, before DTO goes live. (FCA is not being briefed by the Commission regarding these equivalence negotiations). Stephen further noted, “it could become an issue” if there are no such equivalence decisions by 3 January 2018. 

It is not clear from ESMA as to whether you have to report or not to an APA, from an equivalent non-EU venue. The FCA view is that equivalence should implicitly include post-trade reporting. Hoping this whole area of equivalence is clarified further by ESMA, soon.

Although not included in the questions, Stephen Hanks also commented on equivalence for share trading. He noted that there has been a lot of recent discussions regarding ATS (Alternative Trading Systems) in the US and whether they should be included or not. It appears from a statement by Markus Ferber yesterday (6 December 2017) that the Commission will only move ahead with equivalence for ATS which trade NNS shares. Expecting three equivalence decisions for shares to be made before 3 Jan: Hong Kong, Australia and “a third”.  

ESMA looking at 200 venues to determine equivalence. Will not have decisions in enough time for 3 January. (FCA Roundtable discussion – 14 December)

MiFID II firms trading on SEF will have to report transactions. However, it is only the LEI that is expected to be transaction reported. (FCA Roundtable discussion – 14 December)


More information expected on third-country equivalence, in due course.

Important to note (for share trading purposes), The European Commission has adopted a decision to recognise trading venues in Switzerland as eligible for compliance with the trading obligation for shares set out in the new MiFID II/R, which will apply in the EU as of 3 January 2018. This equivalence is limited to one year, and can be extended provided there is sufficient progress on a common institutional framework.

The trading obligation does not comprise other equity instruments, such as depositary receipts, ETFs, certificates and other similar financial instruments. The trading obligation does not include bonds.


10. Please confirm that you do not expect firms to put in place agreements with brokers where the broker is providing free research to the public via their portal and assuming that there is no additional interaction with analysts and sales staff who may discuss research ideas verbally. 


Confirmed, no agreement is required if the research is made publicly available (as a non-monetary benefit) and you arenot consuming other value-added research from the sell-side firm. 


11. Will the FCA soften punishment/fines regarding some items if market disruption looked possible – for example if a low level of LEI’s were in place. What about the following:


  • Readiness of venues 
  • Readiness of suppliers (APA’s / ARM’s / other)
  • SI tracking 
  • LEI / outreach / TOB status across the street*
  • LEI status for issuers on venues*
  • Reporting / transparency issues including sell sides taking different approaches


The priority on 3 January 2018 is to ensure that firms have the correct permissions for the business they conduct and have made the necessary connections e.g. ARMs, APAs.

The FCA knows there are a number of outstanding issues such as concerns with the dependant relationship between vendors, venues, firms etc.

The FCA expects firms to have done their best efforts to be ready for 3 January and to have taken MiFID II/R implementation seriously.

FCA Roundtable discussion – 14 December 2017:

If there is a technical glitch with an ARM transaction report, the report is required to be back reported.

If there is a technical glitch with an APA, do not report. If corrected and still within the deferral period, firm is required to report. Otherwise, data quality for liquidity calculations could be negatively affected.

ARMs and APAs are regulated venues. They are required to let the FCA know if there is a problem with their systems.

Firms should have business continuity plans. However, the FCA is not dictating that firms should have multiple ARMs or APAs. Hoping APAs are functioning on 3 of January and beyond.


*LEIs - Notes from conference call held with FCA, 4pm – 20th December

LEI for clients that are legal persons – new ESMA guidance:

  1. ESMA’s original ‘validation test’ (before today’s announcement) for LEIs is: If there is a missing LEI or the LEI issue date post-dates the trade date, the transaction report is rejected.
  2. ESMA’s new guidance is that for six months from the 3rd of January 2018, ESMA will allow firms to trade with a client, which does not have an LEI, provided the client gives the trading firm a mandate to acquire the LEI on the client’s behalf. The logic of this is that firms will apply for an LEI for a client and receive quite quickly (a few days, if Local Operating Units [LOUs]* don’t have a backlog).

a.       The firm can backfill those transaction reports with the correct LEI to the FCA via the firm’s Approved Reporting Mechanism (ARM).

b.       There should be a process within the firm to hold the transaction report in a queue to submit to the FCA via the ARM, once LEI is created.

c.       The FCA understands getting a mandate might be complicated. For example, a client may have already applied for an LEI or may have multiple relationships with financial firms. The FCA however, is ‘outcome’ driven. Whether a firm gets the LEI on behalf of the client or the client gets the LEI, is not important to the FCA. What is important, is that the LEI is created and inserted into the transaction report within a few days of the trade.

d.       If there is substantial time between the trade date and the LEI issue date, sufficient documentation must be in place to explain this gap.

  1. FCA’s IT system is currently set up for ESMA’s original ‘validation test’ for rejecting transaction reports (with missing LEIs or post-trade date LEIs). It is estimated it will take a few weeks to change the IT system to allow the LEI issue date to post-date the trade date by a few days. Please note, the FCA will be “interested to know reasons why an LEI issue date is significantly after the trade date”. Expect further announcements as to the exact date of the FCA IT change, allowing the new temporary ESMA ‘validation test’ for transaction reporting.
  2. Some ARMs will not be ready with the change to the ‘validation test’. ARMs that passport into the EU are likely to be ready for 3 January. However, all ARMs should be contacted by firms to confirm that plans are in place for 3 January or shortly thereafter.
  3. ‎Local Operating Units (LOUs) supply unique LEIs. Therefore, it is not considered possible for firms to create multiple LEIs when submitting on behalf of clients.
  4. Other NCAs will have a similar IT issue as the FCA. For example, Ireland and France.

*LOU: The Global Legal Entity Identifier Foundation (GLEIF) has introduced the concept of the ‘Registration Agent’ to streamline the issuance of   LEIs.  LEI issuers are also referenced as Local Operating Units or ‘LOUs’.

LEI for Issuers – new ESMA guidance:

  1. ESMA states that starting from 3 January 2018, trading venues are expected to use the LEI codes pertaining to a given issuer when submitting reference data on financial instruments issued by EU issuers. Failure to submit an LEI of the EU issuer will be considered a breach of reporting requirements by the trading venue. The correct LEI of an EU issuer is required to route the report to the correct NCA.
  2. The FCA notes the ESMA statement on LEI for Issuers, which allows trading venues, for a period of six months, to use their own LEI in place of missing issuer LEIs in respect of non-EEA issuers.
  3. FCA further noted that the ESMA statement stressed there is no relief for EU issuers. Relief for trading venues only applies to non-EU issuers because update of LEIs by issuers in the EU is significantly higher than outside the EU. 
    • Trading venues should continue their efforts to populate missing LEI data for issuers. The FCA will be in contact with trading venues in due course to discuss their progress in reducing the number of missing LEIs.

12. Venues:

a.       Due to significant concerns with confidentiality of global personal information there is an industry impasse over the sharing of this data with venues, against the alternative of using a short code that is traceable. A short code is an alias identifier that is aligned to an individual user and traceable, but removes the necessity to share personal information. Can the FCA confirm that it would be acceptable to use such short codes?


It is considered legitimate for trading venues to store personal data in a short code format, locally. Market surveillance information must be transferred speedily. The FCA cannot be dependent on firms to translate this information and then send.  The view is that venues can translate the short codes of information speedily, not firms.

b.       Venues have not established consistent methodologies for handling of cross border or cross entity trades ("on behalf of" entity transactions). This is likely to result in inconsistency of transaction reporting. Does the FCA accept that firms should operate on a best endeavours basis in these circumstances?


Transaction reporting quality will be a key focus for the FCA. There will be a lot of communication on this in 2018.  In particular, the FCA will be looking for inconsistencies. The FCA needs to assess what information they are getting through their trade reporting systems and what they are not.


c.       It is not clear whether there are suitable venues to facilitate the Derivatives Trading Obligation (DTO) during Asian hours. Does the FCA accept that it will not be possible to satisfy the DTO in all time zones?


The FCA hopes that there will be equivalence decisions also for Asian jurisdictions, so firms/clients can trade derivatives subject to trading obligations in Asia when European and US markets are closed.  


d.       Are firms expected to stop trading with brokers from Jan 3rd that are not registered as OTF/MTF?


It is not the responsibility for the investment firm to ensure that brokers have the correct licenses. On that note, sell-side brokers should ensure they do have the permissions necessary to conduct business on 3 January 2018.


Important to note: The FCA is handling many applications from sell-side brokers that want to become OTF/MTFs. The hope is that most firms will carry out permission requests in time for 3 January. The FCA is in close dialogue with firms, as some applications are complex. It is important for firms to have continuity plans and for those plans to tailor their activities to the permissions they currently have.


13. SI and OTC

a.       ESMA will not provide a source for which banks are acting as SI for which instruments. There are multiple industry initiatives to create this data, but no clear outcome. How do you expect that banks will behave on the 3rd of Jan to determine which party will report, since this information will most likely be missing?

The question concerns the lack of a centralised source of information for which firms are SIs, at an instrument level per legal entity. How does FCA expect firms to behave in the absence of this information?


The FCA expects firms to communicate with their counterparties to confirm whether they are indeed SIs and if so at the instrument level. The FCA understands that market participants will need to make judgements on the basis of best information available. The FCA also understands that there is “clearly a risk of over and under reporting”.


Hopefully the lack of SI information will be solved reasonably quickly, after 3 Jan 2018 e.g. due to the need for post-trade reporting flags etc.

The FCA will post SI details on website (from FCA roundtable discussion – 14 December 2017).

b.       In the absence of guidance, it is apparent that different sell sides have taken different interpretations on where cross border trading is in scope, with the result that interbank trades with a cross border dimension could be inconsistently reported, double reported, or not reported. See example below (applies to trading that is not via an IDB registered as an OTF, as the IDB would report). Does the FCA accept that this is a likely outcome? 

Bank A's London office trades with Bank B's HK office, with bank A booking to a US entity and Bank B their UK entity. Bank A may consider an EU nexus and report if seller; bank B may assume the US entity is third country and report, leading to double reporting. Each permutation may have a different outcome.


There are concerns as to ESMA’s Q&A on the geographical scope of trade reporting and diverging interpretations regarding interbank trades with a cross border dimension.

Stephen Hanks noted that there was a recent Q&A from ESMA that dealt with this issue, to a degree. The FCA then stated since there is limited time provided between the publication of the ESMA Q&A on 10 November 2017 and the 3 January, they do not expect firms to make any changes in the set-up of their trade reporting. The FCA is aware that there are divergent geographical interpretations within the market.

There will be discussions on this issue, probably in February, in order to ascertain where the market stands, and which sensible next steps need to be taken in order to achieve consistency.

Some of the interpretations that were included in the ESMA Q&A take a fairly literalist approach to the legislation and would deliver outcomes which the FCA thinks would not advance the objectives of the legislation. For instance, this seems to require significant reporting within the EU of transactions carried out outside the EU. Clearly, some of those issues will be relieved by ESMA’s work in relation to identifying third-country trading venues with similar post-trade transparency arrangements to those in Europe. [See ESMA’s revised opinion released on 15 December 2017]. Trading outside the EU which is in scope of reporting in the EU does not assist price formation or market integrity within the EU.

FCA will post a List of OTFs on 3 January on FCA website (FCA Roundtable discussion – 14 December 2017).


14. What will be the consequences of an FCA rejected transaction report, due to a missing LEI? Is it a failed trade?


First of all, a rejected trade report is not a failed trade. As per question 11, firms need to obtain the LEI information as soon as reasonably possible, after the trade (a few days).

FCA is aware that in the early stages there will probably be a lot of corrections to transaction reports.

15. One of the models which most principal trading firms currently operate in fixed income markets involves a hybrid, whereby part of a trading interest is bid/offered at risk, and the remainder is taken as an order.  Where this is not a significant part of a firm’s business model, industry understanding is that this can continue outside trading venues.  However, where this is a significant part of a firm’s business or for matched principal/agency brokers whose model is almost exclusively based on sourcing prices to match interests, the introduction of the OTF venue has raised questions on this trading practice. 


  • Where the hybrid model is a significant part of a firm’s business, does the FCA expect its authorized firms to abolish this and restructure as either liquidity providers or OTF operators? There appears to be significant disconnect between European NCAs on this.
  • Does the FCA believe that by placing firms into distinct categories like this, it will have a detrimental effect on market efficiency and will this be assessed in 2018?


This question concerns the boundary between OTF and brokerage. Stephen Hanks admitted this is one of the most complex questions the FCA is dealing with. Discussions with firms are still ongoing and will continue. The FCA is continuously learning new information when handling applications from firms wanting to become OTFs. Fundamentally, the FCA has tried to focus its analysis around what is multilateral, i.e. ability to interact.

The FCA believes a single firm can operate both an OTF and brokerage business. However, firms must be able to show the FCA how the activities are separated.

Regarding an OTF, the view is that trading interests are accessed through a screen and are broadcast widely - electronically. It may also have a voice system with an electronic component, with a streaming trading interests process. 

Regarding an agency broker, the view is that the firm has primarily a voice based system.

Some entities have informed FCA that their clients refuse to trade with them unless they have an OTF/MTF license. This area is something the FCA will continue to monitor and discuss in 2018, particularly when they see which entities have applied to become OTFs.  


16. Is sales material with market commentary to be considered research?


The fact that something is labelled as sales material is irrelevant. Whether it is research depends on the nature of the information. Does the material fit into  “minor non-monetary” research or not?

Most importantly, is the information of a substantive nature and does it help firms to make investment decisions? If the answer is yes, it is research. However, if it is only information that provides some general market colour, then the answer is no. It is not research.

Firms should have guidelines in place for sales and market colour versus research discussions.


17. Could you please share some best practice examples of the research consumption monitoring and valuation?


Not at this moment. FCA needs to see what firms have put in place first before they can gauge best practices.

However, firms must have a good handle on what research they are consuming versus what they are paying for. Solely relying on a broker vote for valuing research is not sufficient.


18. Can the sell-side firms partially unbundle research for an asset manager who has a combination of in-scope and out of scope activities, such as a UCITS Management Company and a separate MiFID investment firm license – assuming no exchange of “free research” will take place between its MiFID and UCITS business?

Background: Certain continental clients have determined that they only undertake portfolio management services for part activity, the remaining portion being out of scope for the research unbundling rules. This results in a situation where sell-side execution firms face a legal entity client that is partially in-scope and partially out of scope for the research unbundling rules.


This concerns the situation where a recipient is an asset manager in the EU (but outside the UK) which is authorised under UCITS/AIFMD and in effect segregates their collective portfolio management activity from individual portfolio management services. In those circumstances a UK sell-side firm can provide a bundle of research and execution services to the collective portfolio management activity; provided the relevant NCA jurisdiction has not extended the MiFID II rules to collective portfolio management firms. 


19. Scenario to be highlighted to FCA in order to inform FCA of complexity of implementation: in certain situations, the in-scope asset manager would be paying for research on an unbundled basis, but would place certain trades with out of scope affiliates which attract a bundled commission. 

Background: Many global buy-side firms aggregate trading so that an incoming order for execution from a buy-side trading desk could be for and on behalf of numerous portfolio managers. Practically this means that at the allocation/settlement stage, a bundled commission could be added to an order placed by a legal entity in-scope for MiFID II because that order was placed for and on behalf of an out of scope portfolio manager (e.g. a US manager who consumes research in accordance with US laws and regulations asks its UK affiliate to place an order in EEA securities and charge its (i.e. the US PM’s) underlying clients a bundled commission rate). We wanted to make the FCA aware of this complexity. For the avoidance of doubt, the in-scope entity would be paying for research on an unbundled basis but the trades it places for any out of scope affiliate could attract a bundled commission.


That is a more complex situation which requires further reflection. The rule as written effectively says that if clients of the UK sell-side firms is either a MiFID II firm or a firm authorised under AIFMD or UCITS based in the UK, the sell-side has to separate research and execution services. The firm receiving the flow from a US firm would be expected to fall into one of those categories. Under this rule it is not obvious that a sell-side firm is able to separate out the flow which is subject to the rules directly from the flow which is not subject to it. The FCA has to investigate this scenario further and come up with a view, in due course.


20. In respect of macro-economic analysis published free on a web page, is a call with an analyst to discuss this analysis also considered as a minor non-monetary benefit (assuming no new information is disclosed)?


The FCA wondered whether this would be the case if the sell-side provided research in an audio book, or if the analyst read out the report. It is difficult to conceive that a conversation is held with the purpose of getting no more information than reading the report itself. If new information is provided, which adds value, then this would be considered research rather than a ‘minor non-monetary’ benefit.


II. Free form discussion

1. Question: Will transaction reports without LEIs of the issuers be rejected?

Answer: Trading venues are required to provide the LEIs of issuers whose instruments are traded on their venue for transaction reporting purposes.  


 [Note: ESMA has issued further guidance on LEIs on 20 December].


2. Question: From an asset managers perspective, do asset managers need to take into account which venues the brokers are executing on in light RTS 27?

Answer: Firms are required to consider the available information to understand how brokers are executing order. If RTS 27 helps understand whether a counterpart is doing a good job, yes, but other relevant information can also be used. The key question is: What information is required for firms to assess their brokers.


3. Question: Asset managers execution policy: Will the FCA look and comment on execution policies that will be published from next year?

Answer: Yes, FCA conceivably will do so, it will depend on day-to-day supervision and the thematic supervisory work set out in the business plan next year.


4. Question: With respect to question 20 related to research. In those interactions, there’s probably two reasons why they occur. One would be to get views from the clients on what they think of the research report, and secondly also because clients often don’t read it – would there be any concerns?

Answer: FCA does not have any concerns if the sell-side understands what is the kind of nature of conversation they can have. The question “what did you think” could quickly evolve into a two-way exchange of information where the clients receives an added value. To stay within the boundaries of non-monetary benefits is more challenging if the conversation is less stilted and sell-side firms wish to engage further with their clients.


5. Question: What are the expectations from 3 January with regard to published research if investment managers haven’t paid? Should sell-side firms cut them off, or expect them to pay in the following quarter?

Answer: It would be expected that there is some form of agreement in place for investment firms to continue to receive [non publicly available] research, unless it is part of a free trial. Research can also be paid for in arrears, but there should be an agreement. 


6. Question: Can a trader or salesperson have a view which is different from research, e.g. Bond X is cheaper than Bond Y (publicly available information).

Answer: Stephen Hanks’ colleagues are experts on this matter, he wasn’t sure exactly what was said in response to such a question. It seems that there are difficult boundaries to be drawn, between publicly available information on pricing, historical data, pointing out differences and providing a conclusion that a specific bond is cheap.


7. Question: With respect to question 3 and post-trade deferrals, does this also apply to Systematic Internalisers (SIs)?

Answer: Multilateral trading venues (RM, MTFs, and OTFs) have to apply for post-trade deferrals, there is no requirement for SIs and for OTC execution to let the FCA know in advance what deferral regimes will be used.


8. Question: Going back to the short code question in 12. a), it was said it is legitimate for venues to store short code forms, but then you said the emerging view was it had to be the venue that transforms the information which suggests that venues must have the personal information as well.

Answer: Venues don’t have to keep the records in the specified format of RTS 24. The data can be stored against a short code and the relevant order. The emerging view seems to be that a transaction cannot be allowed into the market unless the required personal information are available. We will need to wait for ESMA to give an official response.


9. Question: Following up on the previous question, if a third-country counterparty is unable or unwilling to provide personal data, does it mean that a trading venue will have the short code, which is technically onsite, and is able to ‘translate’ and see the passport number of the decision maker (who is contravening domestic law)?

Answer: Yes. But if FCA requests personal data, it will have to be provided.


10. Question: Will there be any sympathy in not providing the primary identifier, say providing the concat rather than the national IDs?

Answer: The approach there is that a request has to be made for the primary information. The [third-country] counterparty is under no obligation to provide this information, but template field can be populated with secondary information versus primary. Important to note: Firms should have records that they asked for this information.


11. Question: Could you confirm that a trade in a corporate bond that is interest rate-hedged which involves buying a corporate bond and selling an underlying government bond will be seen as a package trade seeing that two securities are involved?

Answer: It’s been a while since Stephen Hanks looked at this, firms are invited to follow up by e-mail.


12. Question: Does the FCA have any issue with sell-side firms charging one fee for unlimited access to research?

Answer: No, but there has to be some understanding of the way in which the fee is related to the costs of providing that research. The buy-side should think about whether the fee could be considered an inducement or not.


13. Question: A trade done or agreed via chat or call, can then be registered in an exchange to avoid to be counted for SI activity?

Answer: “Avoid” is the wrong term to use, but where it is compatible with trading protocols and the transparency regime, it is possible to agree a trade in a bilateral negotiation and book the trade on a venue


14. Question: With respect to post-trade reporting, is over-reporting better than under-reporting?

Answer: Correct reporting is preferable…


15. Question: Intragroup trades, between different legal entities for risk management purposes, there are no clear exemptions for SI determination.

Answer: A single trade should be reported, otherwise a set of trades which are “noise in the system” would be reported rather than fundamental economic activity.


16. Question: Testing for TOTV for derivatives has not been possible to date, readiness cannot be expected on day 1?

Answer: Hopefully this will be resolved, ESMA was in discussion with ANNA-DSB. This is another case of “best endeavours” for market participants.


17. Question: Readiness for MiFID II and risk of late transposition eg in Spain, are there any coordination efforts?

Answer: The European Commission website provides information on the status of transposition of MIFID II (11 countries). Non transposition matters less than it did with the first directive as much of the legislation is directly applicable. However, it is an issue ESMA is focusing on. [Note: ESMA released a set of Q&A updates on 18 December 2017 addressing late transposition of MiFID II].


18. Question: Post-trade deferrals regimes in the various jurisdictions have often still not be published, eg in Portugal.

Answer: Further Q&A updates expected by ESMA, probably following the board of supervisors on 14 December. [Note: See ESMA Q&A released on 15 December 2017].


19. Question: With regard to reporting for RTS 28 (best execution) it is understood that reporting will be undertaken on a best efforts basis in view of the challenges related to TOTV, is a degree of normalisation expected after the first two cycles of reporting?

Answer: Market participants will be able to do what they can do based on available information and the functioning of the legislation in the first three months. Regarding all of the reporting requirements under MiFID II, there will hopefully be an improvement over the course of 2018 in terms of quality.


20. Question: With regard to the DTO, do you expect more clarity with respect to post-trade transparency because it appears to be explicit about the trading obligation but questions have been raised about comparable non-EEA venues for post-trade reporting, it is not entirely clear whether post-trade reporting has to be done when trading on a SEF.

Answer: ESMA is doing work on this, there are over 200 venues ESMA has been asked to consider by the industry. The equivalence determination will cover a portion of them, but not all of them. Venues in Russia are expected not to be deemed equivalent for the shares or derivatives trading obligation. If a venue is considered equivalent for the DTO or STO, the post-trade transparency regime has to be comparable. [Note: ESMA released a revised opinion on 15 December 2017].


21. Question: Regarding the hybrid model and the question answered previously this is important for regional banks who usually use part of their inventories for parts of client orders, but still need to go the market in a brokerage way, but also sometimes for illiquid bonds go to SI’s or other market-makers. It is difficult to understand what is a “significant” part of a firm’s business, what is the possibility to use matched-principal or own account in a riskless principal basis.

Answer: Trading on own account is related to SI. When a firm receives a client order, some of it may be executed against own SI, but it doesn’t prohibit firms from other forms of brokerage activity including conducting matched-principal trading. And the issue here with matched principal trading is whether the arrangements taken as a whole constitute a multilateral system. [See question 15 under sell-side questions].


22. Question: Going back to research unbundling and the SEC no-action letter, they apply specifically to MiFID activities. In the UK, can UCITS and AIFM firms rely on those no-action letters for research unbundling.

Answer: Yes.



Note: Further information on ESMA Q&A updates issued since the discussion with the FCA and ICMA’s December update on the implementation of MIFID II/R can be found here

  • ICMA

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