The MiFID II Conundrum

It would be understandable if many firms decided to crack open the champagne in celebration of the decision to delay the implementation date of MiFID II by 12 months.

MiFID II is an enormous regulation and one of the biggest and most wide-ranging regulatory changes to have taken place in recent years. The delay is welcome, but it would be a serious mistake if firms were to believe they can now relax and turn their attention away from the demands of the directive.

The decision by the European Securities and Markets Authority (ESMA) to delay MiFID II’s implementation date was taken mainly because the regulator believed that it would be unfeasible for the necessary IT changes and system developments to take place by January 2017.

This difficult decision indicates that there is a huge amount of work still required by firms in order for them to be ready for MiFID II. It is crucial that they use the additional 12 month grace period wisely, in order to implement an appropriate MiFID II programme that can successfully tackle the directive piece-by-piece.

Breaking MiFID II down

MiFID II can be separated into three core pillars, all aimed at supporting investors, which are:

• Fairer, safer and more efficient markets
• Stronger investment protection
• Greater transparency

The roots of the new MiFID II can be traced back to its predecessor MiFID I, which was enacted just prior to the start of the recent banking crisis. However the scope of MiFID II far exceeds that of MiFID I, both in terms of its breadth and its depth. Unsurprisingly, much of the burden will fall upon investment banks, with the impact being felt throughout the organisation; from the front to the back office.

With a regulation as wide-ranging as MiFID II, it can be difficult to neatly summarise it all. We believe that breaking it into manageable ‘chunks’ can help in assessing the overall impact on each individual firm. At GFT we have extrapolated 27 workstreams emerging from the directive that can be categorised within three key themes, which are:

• Markets venues, instruments and infrastructure
• Trade and reference data reporting
• Compliance and investor protection

Markets venues

While MiFID I addressed only equity markets, MiFID II covers virtually all financial instruments, with the exception of spot FX and a small subsection of commodity derivatives.

Firms need to know the difference between the different trading facilities, from Regulated Markets (RMs), to Multilateral Trading Facilities (MTFs), Organised Trading Facilities (OTFs) and Systematic Internalisers (SIs). They must also not forget what remains in the over-the-counter (OTC) markets.

Firms must then decide what business they are in, and what they are not in; and more importantly, what business they would like to be in? As well as introducing a new venue (OTFs), there are tighter rules around the existing venues and updated guidelines on how they operate, and what reporting is required.

Trade and reference data reporting

MiFID II introduces changes to transaction reporting requirements. Not only are there changes in which instruments are reportable but the scope of the data has increased significantly, with some of the required fields not even in existence yet.

Firms have already struggled with the reporting requirements of MiFID I, and with the number of fields to be reported increasing from 21 to at least 65, MiFID II has already provoked much debate within the industry.

Firms will need to be more aware of who they are reporting to, as well as understanding that the MiFID II reporting mechanisms will include far greater obligations than at present.

Compliance and investor protection

The introduction of MiFID II is the first time we have seen directives that cover the responsibilities and the organisation of the individual departments within the bank.

MiFID II builds directly on MiFID I in terms of investor protection. MiFID II goes further with deeper measures and with the scope of products being widened. Many FCA regulated firms will already have implemented programmes to address the requirements. However, firms will need to undertake a complete review of their processes, procedures and operating systems in this space to be sure they are compliant.

Creating an effective MiFID II programme

To effectively tackle MiFID II, firms must face the enormous challenge of structuring a programme (or programmes) of work around the three GFT themes identified above.

This is a significant challenge and given the differing sizes and structures of the various players, there is not a ‘one-size-fits-all’ approach. Every organisation will have its own specific challenges in terms of structure, technology and conflicting priorities. Typically, larger firms will adopt a matrix approach with a programme officer overseeing project teams in each function.

This approach is not without its pitfalls, which should be highlighted. Firstly, the regulation does not necessarily lend itself to being broken down into a functional model, since it is very much a ‘front-to-back’ view. This in turn generates conflict in terms of ownership of delivery and compliance. Even tracking this ownership across an organisation at a macro level can be a full-time job. It is critical that this is properly thought through and is workable for the organisation in question.

An effective MiFID II programme will also require a thorough review of existing technology platforms. Many of the regulatory technology changes that have taken place in recent years have been tactical in nature, a consequence of tight deadlines and unclear requirements. Firms now have an ideal opportunity to adopt a more strategic approach in dealing with the massive technology challenges which MiFID II presents.

It is undeniable that MiFID II is big and it is challenging. For affected firms, 2016 should be about honing the long-term plan and putting into place the necessary programmes and IT structures to ensure that the right tools and expertise are in place to handle the impact of MiFID II in time for January 2018.

Most firms should already have had a MiFID II programme in place prior to the change in implementation date. The sensible thing for firms now is to re-plan their efforts around the revised dates and to front-load as much of the development work in 2016 as possible.

As daunting as MiFID II may appear, firms still have time on their side, but this will quickly disappear if they mistakenly believe they can ease up and take their ‘foot off the gas’. An extra 12 months may sound like a relatively long time, but we all know how quickly time can fly by. There really is “no avoidance in delay”.