MiFID II: In the eye of the storm
A perfect storm is the expression used to describe the cumulative effect of a combination of events which result in an event of greater magnitude, and it feels like one is brewing as the MiFID II deadline draws closer.
As 3rd January 2018 approaches, full clarity on implementation-related questions may not arrive until the summer from National Competent Authorities (NCAs), which will leave banks with a shortened timeframe to enact any subsequent change. I’ve highlighted a number of key focus areas for navigating the MiFID II storm.
The sea of reference data
MiFID II introduces reference data requirements across the current counterparty, product, book and instrument reference data streams, whilst also introducing requirements for employee reference data.
To implement MiFID II reference data requirements across these areas focus needs to be directed towards data governance, in particular in ensuring that data validation rules and controls are consistent and business wide. Moreover, with Legal Entity Identifiers (LEIs) and Instrument Identification Numbers (ISINs) becoming mandatory for those trading under the MiFID II regime, increased scrutiny must be placed on reference data governance to support the front office’s pre-trade controls.
Furthermore, the size and complexity of investment firms often leads to a complex web of operational systems. The key to an efficient, scalable and suitable reference data solution will be predicated on connecting counterparty on-boarding systems, new product approval systems and financial instrument reference data systems, and more importantly for MiFID II, capturing and collating regulatory data, whether directly from the NCAs or the European Securities and Markets Authority (ESMA). Ensuring synchronisation across these solutions will be paramount to servicing downstream data consumers.
The wave of change for trade & transaction reporting
Once firms have built their solution for capturing and managing reference data, they need to focus on MiFID II’s enhanced trade and transaction reporting requirements. MiFID II increases the transaction reporting fields from 23 to 60+, includes a wider range of products, and introduces the requirement to identify the persons (Trader’s National Identifier) and any computer algorithm (Algo) within the investment firm that is responsible for the investment decision and the execution of the transaction. The much discussed systematic internaliser challenge also adds to the implementation complexity of trade and transaction reporting.
With this increased complexity, timely production of an end to end testing strategy and plan is central to being able to evidence that a firm will be ready to deal with the size and scale of the MiFID II transaction reporting requirements. With the FCA, for example, declaring a 3rd July start date for industry testing, now is the time to be planning for this in detail.
Other storm clouds gathering
Whilst MiFID II is undoubtedly one of the biggest changes the industry has ever faced, there are currently several others of a significant, if not equivalent, magnitude. The UK is still unclear on the impact of Brexit on the financial services sector, with clarity not expected until Theresa May progresses further into exit negotiations with Brussels. Furthermore, other regulations such as SFTR (Securities Financing Transactions Regulation), FRTB (Fundamental Review of the Trading Book) and the potential repeal of aspects of Dodd-Frank by the Trump administration will also be stretching banks’ change teams to the limit.
Given the volume of change, there are a number of actions I believe firms should be taking now to prepare for MiFID II compliance.
Firstly, there will be a squeeze on qualified regulatory change resources and so organisations must act now to secure them to implement their MiFID II programmes.
Secondly, firms must quickly establish their list of impacted systems; define their data requirements and work hard to ensure that synchronisation can be achieved across systems.
Thirdly, the ever-shortening timeframes should be appreciated and acted upon. The industry must not allow the press or public uncertainty to dictate their change agenda; rather, they should be aligning the programme plan with the end to end testing strategy now, to head into industry testing on the front foot.
Finally, firms should consider how MiFID II requirements overlap with other impending regulation (e.g. SFTR for transaction reporting), to ensure the solutions they implement are not bespoke to one regulatory use case. Banks can take the opportunity to adopt consistent change approaches that are able to identify regulatory overlaps, and use them to improve out-dated processes and create operational efficiencies.
Firms must act appropriately now to comply with MiFID II. When the squalls have died down, regulators will be keen to inspect the storm damage.