The valuations business is facing an unprecedented amount of change as a result of the barrage of regulatory requirements coming down the pipe and some rule changes could potentially conflict with each other, thus causing serious challenges for those caught in the compliance trap. One such potential clash is between the revised best execution requirements that are being considered under the MiFID review and the level three input data requirements for fair value under the International Financial Reporting Standards (IFRS), explained Richard Newbury, market development manager at SIX Telekurs, during the data vendor’s recent valuations roadshow in London.
The revised definition of best execution under MiFID, which has been proposed as part of the ongoing review of the directive (and its extension to the OTC derivatives market), could result in a serious conflict between these enhanced requirements and those for the determination of best price under IFRS fair value, said Newbury. The Committee of European Securities Regulators (CESR) is seeking to provide much more clarity around best ex requirements in the market in general in order to allow firms to deal with increased fragmentation of the market. However, the requirement to base a best price on aggregate information could conflict with the classification process under IFRS.
IFRS breaks valuations inputs into three categories or levels, ranging from market prices (level one) down to evaluated prices for illiquid securities (level three). The global adoption of these standardscould mean that valuations teams may face a clash between meeting the requirements of the next version of MiFID and compliance with the IFRS rules. The selection processes under both, at the outset, seem to be in conflict with each other, explained Newbury.
One audience member at the roadshow, for example, pondered whether the revised best execution requirements would force all firms down the evaluated pricing route, rather than accepting market prices. The logic being that best ex asks for a price that takes into account data from across the markets rather than opting for one of the three levels of data input an the related calculation methods under IFRS requirements. Newbury noted, however, that this would be unlikely, as the market price would always be the preferred option in the eyes of the regulators.
Regardless, regulators will need to examine this potential clash to determine whether further action or greater clarity is needed to ensure that valuations teams are not negatively impacted.
Newbury added that the development of a consolidated tape under the revised version of MiFID could also result in another reference data item being added to the list of attributes to be included with a price. “The jury is out at the moment on whether the consolidated tape will prove useful or just represent another layer of data to manage,” he said.