MiFID II fixes a number of issues with the original legislation to improve robustness in the soundness of financial systems across member states. It is due to come into effect very soon and organisations have until just 3 January 2018 to get themselves ready for compliance with the directive.
MiFID II addresses far more than equity, which was the core of MiFID – it now covers almost all financial instruments and will have a vast impact upon the structure of the markets. There is also the MiFIR regulation that runs alongside the updated directive. The new rules run to more than 1,000 pages, which alone is a key challenge to correct implementation when there is so much to be taken into account.
Here’s a snapshot of what the new rules cover:
- disclosure of data on trading activity to the public
- disclosure of transaction data to regulators and supervisors
- increased regulatory and client reporting for all asset classes and near-time reporting requirements to the regulator
- removal of barriers between trading venues and providers of clearing services to ensure more competition
- specific supervisory actions regarding financial instruments and positions in derivatives
- post-trade data must be submitted to Authorised Reporting Mechanisms (ARMs)
- new obligations for suitability reporting to protect investors
- new rules on record keeping, such as recording phone calls and emails to ensure better transparency and eliminate conflicts of interest.
What you should be aiming for is a solid compliance culture that starts from the board directors downwards. So, what to look out for? There are a number of areas where organisations need to set up mechanisms for compliance and using technology is key. Technology can ease the burden of compliance and streamline operations and when the right technology is in place, you can be better equipped to comply with MiFID II’s transparency requirements and have a full audit trail on every action.
Some existing technology infrastructure can be repurposed, for example to comply with the trading obligations under Dodd-Frank. It is essential to get databases redesigned, if necessary, to cope with the need for more robust client classification and related client data. Client portals should be enhanced to increase client interaction and give access to their reports, costs and charges. Trading activities should be migrated to more transparent exchanges or electronic platforms, and use supporting algorithms to determine trading decisions. Automated workflows can help process pricing, pre-trade timeframes, integration of data from new sources that helps determine instrument and venue status, use of APIs for data, etc.
It’s not enough, though, just to implement the right set-up and install the right technology. Implementation should be viewed as ongoing, just as regulatory reporting is. Reporting must be monitored so organisations can quickly identify an arising issues and take steps to fix them. It’s widely expected that the European Commission will issue further guidance shortly to enable firms to be ready for 3 January 2018. Indeed, it has already issued guidance in the form of FAQs [https://ec.europa.eu/info/law/markets-financial-instruments-mifid-ii-directive-2014-65-eu/implementation/guidance-implementation-law_en] for firms dealing with brokerage and research services from broker-dealers in other jurisdictions, particularly the USA, in order to stay fully compliant.
Overall, every firm should be looking beyond simply complying with the new rules – with so much data now due to be collected, ensuring their regulatory reporting environment is up to scratch will help avoid regulatory scrutiny.