MiFID II Transparency Puts Stress on Data Architecture

With only four months to go until the MiFID II’s Jan. 3, 2018 implementation date, buy-side firms are facing huge changes in disclosure and transparency requirements, which could upend their data management architectures.

Participants on a webinar hosted by A-Team focused on MiFID II: Data for Transparency, said that firms are wrestling with the changes from MiFID I to MiFID II.

By raising the bar on market transparency, MiFID II has created a huge data management problem for buy-side and sell-side firms, particularly for investment managers. They need to take in a lot of data from the various venues to provide disclosures to their clients and to their national competent regulators. Transaction reporting is necessary for all financial instruments on a T+1 basis, but while MiFID I had 20 fields, MiFID II raises the number to 65.

As opposed to a one-dimensional problem, panelists describe MIFID II’s transparency requirements as multi-dimensional with tentacles that reach into almost every internal system from trade order and execution management (OMS/EMS) to legal entity identifiers (LEIs) and reference databases.

“There is no one specific area which is affected by the data management challenges. It spreads across all aspects of business and technology,” said Irina Sonich-Bright, Director of Global Markets Electronic Product and Head of Business Development at AES, Credit Suisse.

Areas that are most impacted by MiFID II’s data transparency demands are data sourcing, data management, publication and distribution of data, and non-equity instrument data, according to the webinar poll.

The drastic shift in trade reporting requirements stems from the expansion of coverage to non-equity instruments, including fixed income, swaps and derivatives. Another dimension of change is the move to report instruments that are admitted to trade on trading venues as opposed to just the regulated markets.

“There are a lot of entities in the market that suddenly have these transparency requirements that didn’t have them before,” said Beate Born, global MiFID II trading project lead at UBS in the wealth management and private banking space, speaking on the webinar.

In the past, the buy side could rely on their sell-side counterparties to report trades to regulators. But the transaction reporting under MiFID II drastically expands the scope and level of detail required from venues, brokers and investment managers.

Investment firms are expected to comply with RTS 28  —ESMA’s best execution quality disclosures on their top-five execution venues, in terms of trading volumes of executed orders for each class of financial instruments.

ESMA has stated it expects firms to release the first annual report under RTS 28 by April 2018, according to a whitepaper by law firm Eversheds Sutherland.

“We need to look at products that are traded on a trading venue. We need to identify our counterparties because now obviously we have OTFs and SIs that are in the mix that we didn’t have before,” said UBS’s Born. While MTFs existed under MiFID I, MiFID II established organized trading facilities (OTFs) for derivatives and systematic internalizers (Sis).

For OTC products, the sell side has to identify the instruments that are traded on a trading venue. But a grey area is whether they need to report instruments that are admitted to trade, but are not traded.  “All of these business processes are not in place and we don’t know how to get the information and it’s a massive change that has to be implemented,” said UBS’s Born.

Data Management Revamp

To meet these increased demands for MiFID II pre- and post-trade transparency, firms will need to revamp their data management operations to integrate time series or tick databases.

“As a result, a humungous market data submission and contribution activity will be in taking place,” said Sonich-Bright.

In addition to the sheer amount of data that needs to be captured from not only electronic trading activity, there is also OTC trading activity and voice streaming. “How do you record a trade that was submitted by phone up to the one-second time stamp proximity,” asked Credit Suisse’s Sonich-Bright. On top of this challenge, there is increased monitoring for which firms need to have reliant data capture systems, she said.

The nature of the data problem is multi-dimensional because it involves volume, complexity and diversity of the instruments, commented Dermot Harris, Senior Vice President, Regulatory Solutions, OneMarket Data. While people tend to get excited about sharp increases in volume, in MiFID II’s case, experts are worried about the complexity and diversity of data because “reference data is a quiet troublemaker,” said Harris.

Instrument classification, currency codes, ISINs and IENs are among the tougher requirements that his firm is hearing from clients. Among the market data challenges that firms are facing is the creation of International Securities Identification Numbers or ISINs for OTC derivatives.

One of the tricks for dealing with this tsunami of reference data is to find uniformity within that diversity,” said Harris.

As such, firms are looking for data management solutions to bring their data together so they can answer questions posed by the regulation on all of the data at once, said Harris.

Firms “can’t get away with rigid schemas when they are trying to find that kind of diversity in the information types, said Harris. Relational databases tend not to be the adequate solutions, he said. While so-called “data lakes,” which began with the Internet of Things, have become a buzzword in financial IT circles. Many firms that began such projects two years ago have shut them down. They are not useful for MiFID II and quickly turn into data swamps, contended Harris.

Instead, time series-based or event-based databases are most relevant to MiFID II, advised Harris.

Finding Uniformity in Diverse Data

One of the main challenges is the sequence of data and regulators requiring availability at the same time. For example, there can be overlaps in the data with recordkeeping, transaction reporting, best execution, and with the trading obligation to trade on a venue. “And all of these definitions don’t exactly match up within MiFID II,” said Born. Many times, a definition for transparency will be different than transaction reporting. The key is “to match up those definitions and align them and try to reach out to a regulator for an answer,” said Born. Quality of data is also an issue. If a firm needs data that isn’t available in-house, it needs to reach out to a vendor, an Approved Publication Authority (APA), or any other repository or broker or venue for the data.

The answer to dealing with MiFID II’s extensive transparency requirements “is to simplify data usage and try to take the complexity out it,” said Born. Citing best execution, perhaps a firm could trade with fewer venues, and with brokers that are only MTFs or OTFs, she suggested. Or, they could outsource some decisions, such as calculating deferrals,  to publish or not to publish a trade, via an APA, said Born.

Given its scope and coverage of different asset classes, MiFID II is forcing firms to re-evaluate their whole data management architecture, said Harris.  What’s needed is a more holistic data management architecture that connects various systems including OMS/EMS, regulated markets (exchanges), MTFs, OTFs, Systematic Internalizers, LEIs and know your customer (KYC), APAs, and potentially Consolidated Tape Providers, said Harris.

With data coming in fast and furious, the OMS and EMS is timestamping and collecting trades to the millisecond, which then streams into analytics for best execution monitoring, both real-time and post-trade. Workflows can be set up so that data is also fed into trade surveillance under the Market Abuse Regulation (MAR), and for trade reconstruction and for audit purposes. Time series databases can be used for efficient storage of transaction data, reference data and market data.

Ultimately, there will be winners and losers depending on how ready firms are for the massive MiFID II transparency obligations.  Those who think holistically about their data will be in a better position to meet the transparency requirements and could even see this as a differentiator or a revenue opportunity, argued Harris.

However, the firms who have been hit the hardest are mostly the buy side who relied on their brokers to handle transaction reporting, noted Credit Suisse’s Sonich-Bright. They potentially didn’t have enough capital to invest in expensive data management and storage systems, she said.  Going forward, this could become the minimum technology expense that a firm needs to invest in.