Don’t Delay: Using the Additional MiFID II Implementation Time to Your Advantage
The Markets in Financial Instruments Directive II (MiFID II) is the new European regulation for technical standards for financial institutions. MiFID II is setting higher standards of consumer protection for financial services with the underlying goal of increasing transaction transparency. The regulation is complex as it significantly impacts many market participants, including OTFs, MTFs, and broker dealers.
Although MiFID II is a European regulation, it will affect global firms doing business with Europe. Bloomberg recently published a chart showing the wide-reaching effects of MiFID II. The chart does a nice job of demonstrating how best execution will directly apply to many North American and global firms. And The Trade reported a study by TABB Group that found that 66% of US buy-side firms would be impacted by MiFID II implementation in 2018. No matter how you spin in, the fact is that many (if not most) global money managers will have obligations to fulfill even if the regulation does not directly apply to their geographical location.
Why MiFID II is a challenging undertaking for financial institutions
Beginning January 3, 2018, investment firms will be required to prove that financial products were acquired at the best possible price. The onus is on the firm to provide substantial proof; inept or incomplete internal structures will not be an acceptable excuse in the event of noncompliance. MiFID II will primarily affect internal procedures and processes such as: supervisory procedures, risk management related to position monitoring and reporting, client classifications, product governance, testing and certification of trading algorithms, records keeping, and best execution.
MiFID II calls for creating a sophisticated financial data ecosystem, where market participants will be required to capture and submit to regulators all events related to the lifetime of investment decisions. On the flipside, regulators are facing the challenging task of collecting vast amount of information, storing it securely, and providing efficient access to it. The complexity of this undertaking arises not only from the need to process vast amounts of data, but also from the requirement to link events in such a way that a particular market from any moment in history can be recreated easily and efficiently.
Opportunities to ease the transition
With the recent delay of MiFID II implementation to 2018, additional time can be used to address the strategic plan for implementing standards and how to stay competitive in the quickly changing business and regulatory environment. There are several identifiable opportunities for financial institutions to use this extra time to their advantage. Among these, three in particular stand out to me:
Opportunity #1: Use the regulation delay to your advantage by spending additional time on strategy.
Is your financial institution equipped to evolve its internal systems under these new requirements? This could be the time to step aside and to rethink the entire systems landscape. The range of possible decisions could vary from rewriting a particular system to creating a platform to service electronic trading for all asset classes.
Opportunity #2: Move to a utility-based processing model.
Internally managing trading warehouses with accurate order, trade, and market data information might be an overwhelming task for IT and very costly business operation. It is an especially difficult problem to address for those companies that did not have a reporting obligation under MiFID I and will need to create new data management and reporting infrastructures in a relatively short period of time. In that case, outsourcing compliance reporting functions to an industry utility is an option to consider.
Opportunity #3: Use the additional time for modeling the impact of compliance on profitability with best execution regime and pre-trade, trade price transparency.
Based on this analysis, you could develop a solution that monitors the quality of executions (QOE) on a trade-per-trade basis. This solution would compare QOE with peers’/competitors’ QOE results, and adjust execution algorithm parameters to control profitability of the trading.
Though it may feel like you have all the time in the world, MiFID II implementation is rapidly approaching. Consider what goals and objectives are most important for your organization and use the additional time to your advantage. You’ll feel a lot more confident when Jan 3, 2018 is just a few weeks around the corner.