Firms utilising risk-based approach to deal with Mifid compliance

By Michael McCaw | 15 November 2018

Many firms have turned to a risk-based approach in assessing compliance capabilities to fall in line with the Markets in Financial Instruments Directive (Mifid), and its successor, Mifid II.

That’s according to John Byrne, CEO of Corlytics who was speaking this week as part of a webinar on regulatory compliance.

Mifid’s first iteration came into effect in 2007, with the much-delayed Mifid II following it up in January of 2018. Due to the sheer size and breadth of the rules, firms have struggled to cope – particularly those operating in more than one European market where different national competent authorities have established different requirements.

“For a lot of firms this is a journey rather than a destination and so a lot of them are taking a risk-based approach because they have to,” he said. “It’s about prioritising what aspects of the obligations are most urgent, and for what jurisdictions and for what counterparties because it’s not a level playing field.”

Byrne went on point out that while many market participants have gotten into good positions regarding their compliance procedures, fines continue to be reported for those falling short of the initial Mifid obligations.

“A lot of participants are in less of a bad place than they were,” he said. “But when the first Mifid went live in 2007, it really wasn’t until 2010 or so when you started seeing fines around reporting. Even recently you’ve seen firms being penalised for Mifid reporting. There’s been a bank fined last month for not getting their basic reporting requirements together for rules that were put in place over ten years ago.”

For Andrew Fawcett, product manager at communications recording firm Teleware, January 2018 marked a huge change for the company’s clients: with Mifid II transactions must be recorded. That in itself has resulted in some significant operational changes at some organisations.

“There were two very significant changes,” said Fawcett. “All conversations that ‘may’ result in a trade need to be recorded. When you start a conversation, how do you know it’s going to result in a trade? There’s two approaches: one is management by policy, in which a number of firms have stamped down on using mobile phones for trading. The other issue is that when you look at the market in terms of Mifid you’re seeing an order of magnitude more people within the business being covered by the regulation than previously.”

The fact that this information must be stored for five-seven years, according to Mifid II rules, has put much more strain on firms’ data requirements.

“You’ve got an absolute explosion in the amount of data and in terms of reporting, discovery, and analytics – it’s all become a huge issue because the systems that were put in place previously simply can’t deal with that volume of data coming across multiple challenges,” said Fawcett.

The firms with exposures in more than one jurisdiction subject to the rules, dealing with the obligations has been a struggle and a one size fits all approach is likely to fall short.

“We’re largely seeing with larger market players a desire to set a single set of policies globally,” said Fawcett. “But when that desire gets turned into harsh reality you do discover there are very significant differences even within the call recording space. There’s hugely different rules in terms of notifications, etc.”

For Byrne, Mifid II has brought with it a number of unintended consequences.

“Mifid II was designed to make things more transparent, to create more of a level playing field, and to bring more competition into play,” he said. “What’s starting to happen is the opposite. A lot of the larger banks with the larger order flows are able to give away their research for free and a lot of research houses are closing down.

“It’s making the bigger firms more dominant and a lot of the medium sized firms seem to be getting squeezed out of the market place,” he added.

To listen to the webinar in full, click here.  

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