The second Markets in Financial Instruments Directive (MiFID II) is one of the most far-reaching changes to financial market regulation yet. According to HM Treasury, estimates from 2015 for compliance costs for MiFID ranged between €512 million - €732
million and with ongoing costs of between €312 million – €586 million, it affects almost all firms dealing in or processing financial instruments across Europe as legislators aim to promote greater competition, transparency and financial stability.
The European Commission has extended the implementation of the legislation until January 2018, giving submitting firms a longer window of opportunity to prepare. Nevertheless, whether it is an investment bank, large dealer or small investment management
firm from any country in the world dealing with EU organisations, there is much to be done and the window of opportunity to prepare for MiFID II is rapidly closing.
The new regulation introduces extensive changes to reporting requirements, particularly around transaction reporting and transparency requirements. These new requirements will bring in many types of organisations operating in and around financial services
that were previously exempt from it, it will expand the scope of transaction reporting covering all financial instruments beyond solely focusing on equities and change the nature of reporting for those previously covered.
Challenges and Opportunities
MiFID II requires substantial change within financial services firms in terms of both internal infrastructure and day-to-day business processes.
To meet MiFID II head-on, firms need to analyse how the changes impact them, and ensure their IT systems and business processes have the scale and capability to meet the necessary reporting standards. Ultimately, IT plays an essential role in allowing the
transition to happen smoothly. Companies will need to ensure that they have the relevant – and most up-to-date – software and technology in place to comply with the regulation as well as streamline their business processes.
The focus should be on enhancing the systems and processes for reliability and transparency of transaction / electronic trade reporting across more asset classes as well as compliance and investor protection. This will lead to large scale data validation,
consolidation and dissemination of information between market participants.
Many of the issues are highlighted by the European Commission. For example, once MiFID II comes into force, Multilateral Trading Facilities (MTF) systems will need to identify conflicts of interest. Therefore, firms that use MTFs need to put in systems to
discover and prevent these conflicts before the MTF finds them. This inhibits an unfair advantage to one client over another. Therefore, investment in scalable architecture and design systems that consider current transactions – including peaks – and allow
for future growth should be part of any MiFID II implementation plan.
Traditional banks and broker-dealers already subject to MiFID I requirements will be substantially affected by the new MiFID II regulations, which expands to cover a wider range of asset classes. The expanded financial universe now also includes, for example,
small trading firms with limited in-house IT capabilities, asset management, securities services, wealth management and similar financial services firms, large and small, which were not previously subject to the MiFID I requirements. Many of these firms have
limited domain knowledge, operating processes, reporting and monitoring technology tools or other capabilities required for the new areas which they will have to report on, monitor and control. The introduction of MiFID II will significantly change their
business models and organisations need to reassess their service strategies in attracting clients and adapt their systems quickly in order to adhere to the new transparency and reporting standards.
Forward-thinking firms will put a MiFID II roadmap into action and use this opportunity to upgrade their business processes, data quality, IT infrastructure and ensure a flexible approach to take advantage of the market benefits the legislation could bring.
By introducing MiFID II requirements now, financial services companies can potentially lower their cost of compliance, re-use existing data content, manage data retention and distribution more effectively and avoid having to implement a last-minute tactical
solution, which subsequently may need to be revised. By working with the right experts in a collaborative eco-system they can achieve maximum benefits.