We are ten months on from the implementation of MiFID II, the biggest change to capital markets rules since the ‘Big Bang’ in London’s financial system in 1986.
The most salient issue linked to institutional asset management within MiFID II is the opaque fees paid for securities research. But closely coupled with this is the ‘best execution’ requirement.
Best execution for securities dealing is a topic that predates MiFID II, but The Lens has been persuaded that the regulation will bring far more attention to it.
So as not to be opaque ourselves, The Lens will transparently tell you the notion of greater momentum for best execution was gleaned in a Funds Europe webinar recently, in which Gerard Walsh of Northern Trust Capital Markets said he expected more buy-side dealing to be outsourced to the likes of securities services providers. This includes, naturally, Northern Trust. But notable is that RPMI Railpen, the pension fund, outsourced some of its internal dealing to BNP Paribas Securities Services way back in 2013.
Outsourcing by asset managers and pension funds with their own internal investment function has always centred on back and middle office activities: fund administration, for example.
The dealing function is firmly a front-office and, for some, alpha-generating activity. Large-scale outsourcing of it would be near revolutionary.
So could MiFID II make that happen?
Costs and complexity are at least two drivers that suggest it will. Costs stem from technology needed to gather data and keep records for audit trails that show how best execution decisions were made.
And those decisions could involve some arcane discussions. If you thought best execution meant cheapest execution, think again. MiFID II means fund managers have to justify the price they pay, and the cheapest price will not necessarily be the most justified.
Rather than invest in technology, collect records and justify their actions, some fund management firms might, instead, prefer to let outsourcing providers do it for them.