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Julian Korek, Duff & Phelpsff & Phelps

Setting out a compliance roadmap


At the last count, there were approximately 1,384 pieces of information to look through under MiFID II. For Chief Compliance Officers, that is an awful lot of work to get on top of, which is why implementing a compliance roadmap as early as possible is so important. 

To help with this, Duff & Phelps, one of the industry's leading regulatory compliance firms, has produced a solution named MAST: MiFID Analyser Solution & Tracker. This enables people to fast track in and identify, according to the permissions they have, what rules are likely to hit them and identify a `To do' list for the areas that will require amending. 

They can then track the progress of those amendments by using the tracker component of MAST. It's a sophisticated tool that has taken Duff & Phelps nine months to build. 

"Given the need for MiFID firms to start transaction reporting, the sooner they think about it the better because it is likely going to require new systems, implementation of those systems, testing and so on," explains Julian Korek (pictured), Global Head of Compliance and Regulatory Consultancy. 

Putting a compliance `to do' list together certainly has its merits, although it is predicated on the assumption that CCOs can prioritise elements of MiFID II. While taking practical steps to identify key areas such as transaction reporting, is a sensible approach, buy-side firms should not fall into the trap of relegating other areas in the hope that the FCA will take a compassionate view.

"People are very stretched," says Nick Bayley, Managing Director in Duff & Phelps' Compliance and Regulatory Consulting Practice. "I doubt that the FCA would pay someone a visit and interrogate every single aspect of their MiFID II preparation but, having worked there and knowing how they operate, they will likely be more worried about some aspects of MiFID II than others."

Cutting corners is not advised although Bayley believes there are some changes that firms should be focusing on now, and quite a few that they could leave until later in the year.

Clearly, a firm that needs to change its permissions or apply for new waivers will need to act fast and anything system or data related like transaction reporting or transparency needs early focus. 

Korek's point about IT systems is important as part of the roadmap exercise. Speak to most people and the common consensus with MiFID II is that it is a data management challenge, over and above anything else. If the internal systems are not up to task, this could present serious challenges moving forward.

Take transaction reporting as an example. If the FCA comes knocking and asks for full details on a specific transaction, the manager had best be able to supply it quickly. Taking a ham-fisted approach by submitting a batch file and asking the market abuse team at the FCA to find it themselves, will not endear the manager to them.

"If the market abuse team sends you an information request you've got to be able to retrieve that information quickly. Spending weeks looking for it is not going to be acceptable. Rather, the FCA will start asking serious questions as to whether your record keeping is of a high enough standard. 

"Under MiFID II, firms will need to be able to pinpoint data in a more organised way than they currently do. They are going to have to provide more granular data to clients, more information on things such as costs and charges, more information on the quality of trade execution. This is not necessarily something they've needed to do in such detail before. Their data management and retrieval capabilities will need to be of a high standard," explains Bayley.

External intelligence

It's important to undertake an external intelligence gathering exercise. Engage in discussions with all relevant counterparties. For research unbundling, look at what research you receive, who is comes from, and crucially what value the front office places on it. 

Look at your IT vendors, those providing market connectivity, market data, best execution tools, phone recording, data management systems and the like – and ask them how their products are going to be enhanced to be ready for MiFID II, says Bayley. 

Find out if their systems are going to include the additional data fields, whether they will cover the new requirements for non-equity and whether they have a solution to your particular challenge.

"There are lots of areas where early discussions should be initiated and I am seeing a widespread exercise of request information about MiFID II kicking off in the marketplace," confirms Bayley.

Internal assessment

At the same time firms should conduct a review of internal readiness. Managers should assess their IT and record-keeping infrastructure and understand where all the required data is stored. This is going to be especially important for transaction reporting. Across those 65 fields, where is the data, who owns it and how is it going to be retrieved and organised? 

Moreover, for those who have a transparency (trade reporting) obligation, they will face the pressure of handling information (albeit a smaller data set) that will need to be reported in near real-time; within one minute in the case of equity trading.

Part of this exercise should involve gap analysis on the client's existing internal IT systems to ascertain whether they will be able to access data and monitor it effectively. 

"For fund managers, it is also the MAR obligations to detect market abuse and market manipulation that they should have in minds when looking at how the manage their MiFID II record-keeping. Regulators expect firms to be able to look right across their records and link them to transaction activity. Any records that inform the decision to trade are potentially relevant. The MiFID II 5-year record keeping obligation includes a wider information set and with respect to unstructured data like voice communications, it's pretty hard to link to transactions and retrieve," asserts Bayley. 

"If you are a CCO and one of your traders does something strange, if you can't access the relevant communications data that contributed to why a trade or set of trades was made, your life could become extremely difficult," suggests Bayley.

Doing the right things

Given the scale of the challenge, what can be left for later? Internal matters that do not involve significant IT or business process changes may have to take a back seat for now. Compliance procedures will need to be updated and there will need to be additional compliance monitoring but this is perhaps less important, at this point in the lifecycle, than the matter above. 

Bayley is hopeful the FCA will signal what its MiFID II supervisory priorities will be later this year. He says managers must read the signals – research unbundling has long been an FCA hobby-horse, poor transaction reporting has led to lots of enforcement action over the years "and the quality of best execution by asset managers has been clearly signalled as being of concern to the FCA". 

Above all, don't be an outlier – find out what others are doing and play catch-up if needs be. 

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