MFA Blog

MFA President and CEO Richard H. Baker Op-Ed on MiFID II

Posted on February 1, 2018

Op-Ed on MiFIDII
Richard H. Baker
President and CEO, Managed Funds Association

Investment firms and financial institutions across the world are working overtime to satisfy the requirements of the Markets in Financial Instruments Directive II (MiFID II) and develop solutions to unexpected implementation issues.

As the President and CEO of Managed Funds Association I can assure you that the hedge funds and managed futures funds who make up our Membership are no different.

Our Members appreciate the understanding and patience of European policymakers as the industry undertakes this massive effort.

Still, as is to be expected, implementation has brought some challenges, just as the implementation of complex regulations has brought challenges in the United States. We are committed to working with the appropriate policymakers to seek solutions that strengthen our ties with Europe.

One area where policymakers could facilitate the objectives of MiFID II and enhance transparency and the accuracy of data reported to regulators is transaction reporting and trade reporting.

For instance, requiring both parties to a transaction to provide their Legal Entity Identifier number to their counterpart in conjunction with a transaction will help ensure consistent and accurate transaction reports. Regulators could also further increase transparency by making public an official and granular list at the EU level of systematic internalisers – a new term for a trading facility that executes client orders using proprietary capital. Without an official list of systematic internalisers for each product, market participants are more likely to under- or over-report trades to regulators.

The implementation of MiFID II is emblematic of an effort to modernize European capital markets. Across the EU, countries are working to remove longstanding impediments to investment to enhance economic growth.

To put even more capital to work for Europe’s economies, MFA believes policymakers should keep intact regulations that work well, fine-tune those that do not, and ensure new ones recognize the unique nature of investment management firms.

There are a number of policies currently under consideration that could impact Europe’s ability to strengthen its markets and tap into alternative pools of capital.

A Capital Markets Union, for one, has the potential to encourage the efficient and effective allocation of capital, but we believe the final product must put all market participants on level footing and foster sources of capital that complement bank lending. This is particularly important for small- and medium-sized businesses, many of which depend on non-bank financing to fund their operations and growth.

Ensuring the free flow of capital across EU member states and eliminating the patchwork of regulations and restrictions would attract additional capital and market participants.

MFA also understands the European Commission’s development of a Prudential Regime tailored for investment firms. We do not believe that regime should use assets under management as a metric for determining the level of risk posed by an alternative manager. Because hedge funds are not systemic, we strongly encourage a cap on capital equal to the size of caps in established regulations.

The ongoing European Supervisory Authorities Review is also of great interest to our Members. MFA is concerned that any significant changes to the ability of EU investment managers to outsource or delegate the management of certain funds could deny European investors access to investment experts in New York, London, Hong Kong, or Sao Paolo. The existing delegation model has been in place for decades and our Members see no reason for it to change.

In addition to advocating for these policy priorities, MFA has worked tirelessly to ensure Members maintain access to European markets and European investors get the benefit of our Members’ expertise during the Brexit transition period.

Our Members are aware of the vast opportunities Europe offers. That is why so many of them already operate here – for example, our Members help European pension funds by providing stable returns over time and reducing risk and volatility in their portfolios.

MFA will continue offering reasonable suggestions to streamline and simplify regulations and legislation and give analysis and feedback to help policymakers ensure fair, transparent, and efficient markets.

That is the charge given to us by our Members and the investors they serve.