In the financial markets, there are many groups concerned about the looming Mifid II deadline. Of those, fixed-income traders—and specifically fixed-income traders on the buy side—are facing major questions as to how they will react come January 3, 2018. 

As an example, at the European Trading Architecture Summit held last November, Ayaz Haji, head of Mifid II technical architecture and data strategy for Goldman Sachs, noted that the new regime could effectively kill voice trading in the fixed-income market.

“It would be very difficult for firms to be Mifid II-compliant if they are voice trading, if they are trading what the European Securities and Markets Authority (Esma) deems to be liquid products,” Haji said. “The true cost of Mifid II will become apparent very quickly once we start complying with the regulation.”

Barring another (unlikely) delay, the directive’s deadline is drawing near. Constantinos Antoniades, who heads up Liquidnet’s fixed-income business, tells Waters that he recently spoke with “a very senior person at a very large firm” and that individual told him that they “effectively spend 75 percent of their time on Mifid II and the other 25 percent running the trading business.”

Best Ex

After all, changes have to be made to the infrastructure to ensure compliance, firms need to be able to collect and store more data more efficiently, and they have to streamline their report-generation practices. And there are still large numbers of vagaries that firms are having to navigate. 

For example, the rules around best execution requirements are broad, which has created some consternation throughout the industry as to whether they are following the letter of the law. In equities for example, you have an exchange to benchmark best ex against using real data points. Conversely, in the corporate bond market, while there are electronic platforms increasingly populating the market, there’s not an audit trail like there is in the equities market.

So, in this scenario, how do traders estimate what the best bid or offer is in a specific bond that hasn’t traded for weeks or even months? If they go to the market to get quotes, they won’t get best execution. How do they get this data? Is a quote from a dealer at the morning open good enough? These are questions that need to be answered, according to Antoniades.

“The process is very unstructured in fixed income and it’s supported by a lot of data, which makes the best execution process very difficult,” he says. “Mifid II is resource intensive with a lot of unknowns.”

Trade Reporting

And more worrisome are the trade reporting requirements, Antoniades says. Starting in January, depending on who firms trade with, what capacity they trade and the size of the trade, asset managers are potentially responsible for trade reporting, which is a whole new world for most on the buy side.

“Most asset managers don’t want to be in the business of having to do trade reporting and therefore they’re going to change the way that they trade to make sure that they trade with a party or venue that does the trade reporting for them,” he says.

The calculus of making a trade is likely to change, Antoniades says.

“Today you look at your Bloomberg messages and see who has a bid in a bond you want to sell. That’s no longer enough under Mifid. You need to know under which capacity this person is trading—agency or principal—whether they’re a systematic internalizer or whether they’re operating in a venue. Depending on all those factors, you may or may not be able to execute that order,” he says. “Every single time you look at a price or a quote or trade, you’ll be doing something different than what you’re doing today. The level of complexity in terms of how you source liquidity will increase dramatically under Mifid II.”