Is Australia headed for MiFID II?

There may not currently be an intention to introduce Europe’s MiFID II regulatory framework to Australia, but local fund managers would do well to emulate some of the outcomes, according to the Australian Securities and Investments Commission (ASIC).

At the same time, ASIC revealed it was intending to conduct surveillance on foreign exchange transaction liquidity providers to check their disclosure and internal processes amid concerns around so-called “last look” practices.

In an address to the CIMA Society of Australia annual conference, ASIC commissioner, Cathie Armour cited the MiFID II reforms, and said they were interesting because they were translating some of the expectations for asset managers acting in the interests of investors into more concrete behaviours.

She did so in the context of having told the conference that while the investment management industry may not have had the same Royal Commission scrutiny as other sectors, that did not mean cultural failures did not apply to the industry.

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“And, of course, investment management professionals may find themselves in the regulatory spotlight soon enough,” she said.

Discussing the implications of the MiFID II regime, she cited the principle that asset managers should not incur costs unless the value for the fund has been carefully considered.

Armour said the unbundling of brokerage research services was potentially creating new norms about how this might apply in practice.

“Another general principle consistent with how we would expect an asset manager to operate is to transact in a manner that delivers the best outcome for the fund. The best execution requirements emphasise this,” she said.

“We have seen how some fund managers' approach to their execution responsibilities can lead to broader market misconduct. For example, we have seen how fund managers' interests in transacting foreign exchange transactions at a benchmark (commonly referred to as at the Fix) but for no cost, may have contributed to inappropriate trading around the FX benchmark.”

Armour said one area ASIC had looked at recently and which was an area the regulator thought the CIMA Society should be asking fund managers about was the practice in FX markets of “last look”, in which a liquidity provider had the ability to decide over a fraction of a second whether to accept or reject a trade request from a client.

“While 'last look' may help facilitate a liquidity provider's legitimate risk management, it also introduces the potential to exploit confidential client trading intentions and to otherwise treat clients unfairly,” she said.

“We are also concerned around the quality of client disclosure about the practice, with many clients unaware of the practice. We have recently undertaken a review to better understand 'last look' and will publish our observations and findings in due course.”

The MiFID II framework also could provide a template for improving transparency, the need for which was made clear in the Royal Commission. Super Review is commencing a campaign on improving transparency in the industry, with European Union guidelines for fund disclosures a possible way in which this could occur.