Why 2017 must be the year of compliance. Part 2: MiFID II
By George Ralph (pictured), RFA – If you hadn’t already got enough on the agenda for this year, MiFID II - Markets in Financial Instruments Directive II - and its accompanying regulation, Markets in Financial Instruments Regulation (MiFIR) are looming ever closer to their full implementation date of 3rd January 2018. That’s 23 weeks away. I don’t need to tell you that it’s not long at all.
So what do firms need to do? The main changes include:
- Pre-trade, the main changes relate to increased transparency, with firms being required to report off-venue Actionable Indications of Interest and executed prices, through an Approved Publication Arrangement.
- Trading venues will be responsible for reporting prices and trades made on-venue.
- All firms must record and store all telephone and electronic communications relating to a client orders, even if that order doesn’t ultimately transact.
- Buy side firms will need to ensure they can access to extensive information on the financial instruments they trade.
- Investment firms must have the mechanisms in place to enable them to report any relevant transactions to the regulator or ARM by close of play the next working day.
- Investment firms offering “independent” advice, must also offer a sufficiently wide range of diverse financial instruments to be considered “independent”.
- Put processes in place whereby firms can provide the right type of clear, fair information to eligible counterparties.
- Ensure renumeration policies and practices do not conflict with clients’ best interests and the quality of client services provided.
- Make provisions to decouple research fees from client fees, and to only use research that has been paid for directly, or from a separate research fund (paid for by a few charged to clients). Research cannot be used as an incentive, or a non-monetary benefit.
Importantly, firms must prepare to manage significant increases in data volumes under MiFID II, as reporting will be expanded to cover all asset classes, and transaction reports will be extended to include many new fields – 65 in total, compared to just 25 under MiFID I. However, once all of this data is in place, a small number of additional fields can help meet other MiFID II requirements. For example, venue analysis demands only one extra data field, while best execution requires just a further ten and Transaction Cost Analysis another twenty.
In addition, firms must also consider how they will combine and maintain diverse data sets, including transaction, legal entity, personnel and reference data, throughout the transaction lifecycle. The use of new identifiers, such as International Securities Identification Numbers and Legal Entity Identifiers, and the management of non-public personal information also adds complexity.
Managing data sets that are growing in size, diversity and complexity is not a straightforward task and could call for a complete technology overhaul.
Ask yourself if you have the right infrastructure, the right team and the right policies in place to meet the requirements below and if the answer is no, get to work immediately.