10 Nov 2020

Why the Covid-19 crisis may provide an easing of the regulatory burden.

By Hugh Leask for Hedgeweek

With Insights by George Ralph, Managing Director of RFA

With certain aspects of the EU’s ongoing MiFID II review affected by the coronavirus pandemic, Hedgeweek explores how a fresh overhaul of the framework may further impact hedge fund operations, and why the Covid-19 crisis may provide an easing of the regulatory burden.

Introduced in January 2018, the European Union’s Markets in Financial Instruments Directive (MiFID) II brought sweeping changes to transparency rules and transaction reporting requirements across the financial markets spectrum.

Among the major reforms impacting hedge funds was a package of measures covering third party research. These included extra scrutiny over the ways that asset managers pay for sell-side analysis, and the unbundling of research from brokerage fees, a move aimed at curbing inducements to trade.

Almost three years on, industry consensus indicates MiFID II has led to a reduction in hedge fund research spend. But anecdotal evidence also suggests portfolio managers have sought to capitalise on the reduced amount of stock analysis with targeted research budgets to help them gain an edge.

The European Commission kicked off an industry-wide consultation on its planned MiFID II review in February this year. But certain parts of the review have been delayed as a result of the Covid-19 pandemic, with ESMA expected to report back on these in early 2021.With the EU still in the process of reviewing several planks of the MiFID II rules, attention has turned to how the European Securities and Markets Authority -the pan-EU financial watchdog tasked with overseeing and implementing the review’s findings –might bring about further regulatory changes, and what that might mean for hedge funds.

‘Extraordinarily focused’

The industry on the whole has adapted and pivoted to meet MiFID II requirements, according to George Ralph, managing director, RFA, which provides IT, financial cloud and cyber-security services to investment management firms.

There has also been a closer focus among hedge funds and other asset managers on moving towards more robust systems and reporting, well as ensuring continued training around both policies and restrictions. “They have invested in more advanced technologies to ease regulatory burdens and there has been a move towards outsourcing for access to subject matter experts,” Ralph told Hedgeweek.

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