Asia-based hedge fund managers appear sanguine about the potential impact of Europe’s incoming second Markets in Financial Instruments Directive (Mifid II), and that is understandable, said Adam Jacobs-Dean, head of global markets regulation at the Alternative Investment Management Association (Aima).
However, they should be aware that some of the new requirements – due to take effect from January 3 next year – may well have implications for their business and how they trade, he told AsianInvestor, in both the short and longer term.
For example, if a UK fund firm delegates management of a portfolio to an overseas house, the London-based Financial Conduct Authority expects the offshore manager to run the delegated assets to Mifid-like standards, said Jacobs-Dean, who is based in London. This principle applies to such arrangements between hedge funds in the UK and the US, he noted, and will presumably also apply to portfolios handed to Asian managers.
The directive’s key goals include achieving greater market transparency, a shift in trading towards more structured marketplaces, lower-cost market data, improved best execution, orderly trading behaviour, and more explicit costs of trading and investing.
Mifid II is set to have an knock-on effect on larger long-only fund houses in Asia, as AsianInvestor has reported. For instance, Australian fund house First State Investments has said it would stop paying for research out of dealing commissions, as a response to the new law.
But it seems unlikely to have a big direct impact on most Asia-based hedge fund managers, noted Jacobs-Dean. “Strictly speaking today, if you’re an Asian manager that is largely focused on Asian markets and doesn’t trade with European brokers or on European venues, then Mifid ii may well pass you by,” he said. “And that’s not unreasonable.”
New trading rules
Of course, parts of the rules may be relevant for managers that trade with European brokers and in European markets – such as requirements on position limits and derivatives trading obligations, said Jacobs-Dean. “Because those are extra-territorial in nature. They don’t necessarily require massive compliance work; they probably have more of an impact on what you can do in terms of your trading strategy.”
Hence home-grown Asian managers do need be aware of how the trading environment might change in Europe, he added. That’s because there will be far greater transparency in terms of fixed income instruments and derivatives, and new requirements around position limits for commodity trades.
“Those sort of things will have a broader impact,” noted Jacobs-Dean. “They are probably less about day-to-day implementation and more about looking at your trading strategy and seeing how it’s affected.
He added: “I’ve had a couple of conversations with managers in Asia Pacific, who said they’d looked at Mifid II and were not very concerned. And that may well be the right answer [for many hedge funds there].”
However, it’s a different matter for Asian businesses owned by a global group with operations in Europe. If parts of the business in the EU are implementing elements of Mifid II, said Jacobs-Dean, the group may well take a blanket approach to implementation, especially for certain of the requirements.
“There are aspects of Mifid II where it becomes harder to justify having different approaches in different bits of your business,” he noted, “particularly when it comes to areas that are investor-protection focused, such as payment for research, best execution requirements or certain controls where it makes sense to implement them in a global way, such as controls around algorithmic trading.”
Research payment changes?
Meanwhile, asked whether he thought many hedge fund managers would, like First State, cease paying for research out of dealing commissions, Jacobs-Dean said the answer was no.
“I’d say that at least 80% of Aima members will still pay for research out of a research payment account – that is, by using CSAs [commission-sharing agreements] as they stand today. At this stage the overwhelming preference among hedge funds for payment for research from a research payment account.”
And clients are unlikely to request a change in this regard, said Jacobs-Dean, as long as their costs are not going up. In any case, the trend in the past few years has been for managers to spend less money on research, he added.
AsianInvestor is launching a brand new event, COO Forum, to be held in Hong Kong on October 12. To hear more about Mifid II and other key issues affecting Asset Management COOs please contact Terry Rayner by email or on +852 3175 1963.