A Long and Detailed Checklist – Best Execution article

The FIX Trading Community established a number of MiFID Working Groups in May 2015. With just a few months of the year remaining, Tim Healy, Global Marketing and Communications Director, provides an update on FIX’s MiFID II initiative.

What have been the areas of focus for the FIX Trading Community?
In May 2015, the EMEA Regulatory Subcommittee looked at specific items in the MiFID II text to see where the use of standards could be optimised to help the membership. Bearing in mind that FIX has 290 members made up of buyside, sellside, venues, vendors, consultants and industry associations, we knew there would be a strong depth of knowledge that could be tapped into. Importantly, we also wanted to get industry consensus on the more subjective topics.

From the large number of issues included in MiFID II, the topics we examined here at the FIX Trading Community were: best execution, clock synchronisation, commission unbundling, microstructure, order data and recordkeeping, reference data, trade and transaction reporting and transparency.

Our FIX Trading Community co-chairs are all market practitioners and are focused on these issues as part of their every day jobs. Importantly, many of them sit on other industry working groups as well, which gave us some insight into their work and discussions occurring outside the FIX Trading Community. It was important not to duplicate efforts.

What work has been completed so far?
For best execution, FIX Trading Community has produced a ‘Recommended Practices’ document that explains which entities must report under these new requirements, what data they must publish, how often, as well as providing clarity as to how these reports apply to different scenarios based on the entity, their role in the trading workflow and the trading model they employ. The document has had numerous versions and we are now at the point of presenting this to the regulators and incorporating their feedback into a finalised version. Additionally, XML schemas will be made available for firms to implement RTS 27 and 28 in a machine-readable format.

For commission unbundling, MiFID II has introduced the requirement to explicitly separate commissions into their component parts, execution and research, with a focus on the specific identification of the research component of the commission. Members have worked with the Global Post Trade Working Group to create a document that provides recommended practices to facilitate industry-wide implementation of post-trade processing via FIX between buyside and sellside firms.

For order data and recordkeeping, FIX combined efforts with the Association for Financial Markets in Europe (AFME) to produce a definitive guide with different scenarios that provide details of obligations for order data and record keeping for buyside, sellside and venues. These scenarios go into significant detail with the required MiFID fields and the FIX tags and values that map to them. It was important we combined efforts with AFME on this to ensure a co-ordinated approach and include their members.

What has been the biggest concern for members?
Other than the sheer amount of work involved to be compliant in January 2018, there has been pressure on FIX as an organisation to ensure the work is produced in a timely manner. The most pressing area of concern has been the flow of information between the buy and sellisde. To that end, post-trade transparency and trade and transaction reporting obligations have been key priorities. These will be in place on 3rd January 2018, and firms do not want to be exposed to potential issues with the regulators.

There are a number of different documents that have already been produced that cover both trade and transaction reporting. In both cases, the documents show where the obligation to report sits and highlights different scenarios. This required us to examine these issues in some significant detail, and we have documented very specific responses. For example:

If the execution is between a systematic internaliser (SI) and non-SI MiFID investment firm, then the SI reports.
If the execution is between two SIs, the seller reports.
If the execution is between two non-SI MiFID investment firms, the seller reports.
If the execution is between two firms, neither of which are MiFID investment firms, neither firm reports.
If the execution is between a MiFID investment firm and a firm who isn’t a MiFID investment firm, then the MiFID investment firm reports regardless of whether they are buying or selling and whether they are an SI or not.
Failure to report is not an option. Likewise, duplication of trade reports will not be regarded well, so it is crucial that firms understand their obligations.

What work is still outstanding?
The ultimate aim for the FIX Trading Community is to provide a definitive FIX and MiFID document to consolidate all the work that the members have done. The sheer volume of documentation means that there is a need to provide members with a reference guide summarising the different requirements. We want to present a consolidated view across the Extension Packs and Guidance documents from the various MiFID II FIX Working Groups and the potential FIX interface changes required by both investment firms and their clients.

FIX has its history in the cash equities space. Over the years, much work has been done across different asset classes as FIX has evolved. However, we still feel that there is a need to pull in more expertise in the Fixed Income, Currencies and Commodities (FICC) Working Group, and to leverage this expertise for the work on MiFID II. Of course, there will be other initiatives that this Working Group can review and work on, but the overriding concern at the moment is MiFID II.

The work is not yet complete; there is a need to ensure the best practices documents are relevant to all segments of the market. FIX has a long history of being inclusive and we actively welcome new members to bring their expertise to the table and participate. Standards in our industry are incredibly important in an increasingly complex and cost-conscious environment. We have seven events globally between now and the end of the year and we encourage people to attend and listen to the updates from the working groups at each of these.