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Jan-Willem Van Capelle

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MiFID II: regulatory burden or a driver for innovative change?

31 July 2017  |  3502 views  |  0

Today, MiFID II is undoubtedly the main point of focus for financial services providers. Coming into force on January the 3rd 2018, every MiFID responsible compliance officer or project manager is supposed to be finalizing necessary organizational changes, and will soon be implementing regulatory tools that are required to become compliant.

Both the complexity and magnitude of new regulations, as well as the financial consequences of not complying, have made compliance departments of financial institutions more important than ever. Especially within the larger institutions, this has led to an enormous growth in hiring qualified personnel, dramatically increasing the size and responsibility of compliance departments. Particularly this increase in responsibility has led to the fact that regulatory risks are being addressed from the sole perspective of mitigating them. In many companies, defining the requirements for complying with MiFID II is done by people whose main responsibility is to check if business practices comply with rules and regulations. Should the business not be more involved?

Instead of blindly changing existing practices and implementing tools just for the sake of being compliant, why not address MiFID II as a business opportunity? At the end of the day, the purpose of MiFID is to create financial markets where investors can safely trade preferred financial instruments. MiFID is putting the end investors, the customers first. Looking at the matter from that angle, financial firms might realize that this is actually an opportunity to investigate the sustainability of current business models, and to treat necessary changes as a possible driver for the often much-needed innovation. Maybe this can be a trigger to provide an answer to the Fintech threat that everybody is talking about?

If we look closer to why FinTech companies from a threat, the answer is not so much that some of them have brilliant new ideas no other firm have come up with (surely there are some). It is much more about the fact that they use data as the basis for everything they do and have figured out a smart way to capitalize on it. In that sense, the priority for financial firms is often not to change existing business models but to focus on transforming into a truly data-driven organization. And data-driven doesn’t start by analyzing or interpreting data, it starts with an efficient data infrastructure that grants easy access to all the data available within the company. This could not only give companies a chance to better understand their clients’ needs and provide them a better service. It could also increase the ability to easily comply with the ever-changing regulations because it makes organizations more flexible. To put this in perspective, here are some examples of practical solutions addressing two MiFID II requirements,

Recording communications and record keeping.

This piece of regulation imposes firms who fall under MiFID II to capture, store and have all communications (email, IM, voice, etc.) with clients but also internally, readily available. This seems pretty straightforward and easy to comply with, and it probably is. But what if we look at this from a business perspective. All the client data that is captured can be, if looked upon from the proper angle, very valuable. The challenge is to structure the various types of data in a way that people or applications can work with it. Voice, in particular, is probably the biggest challenge. But, luckily, there are some smart solutions that can help, of which I know two. The first one is Rosette, from a company called Basis Technology. Rosette is a highly sophisticated text mining application that allows firms to build applications on top of all sorts of communications, including voice. If you are looking more for an off the shelf product, look at Insightful Technology. This company has an application that captures and stores all forms of communication within an organization, including mobile phones, and presents all the data in a searchable format, usable both for compliance purposes but also for use in CRM systems. For example, all different conversations with clients are stored and can be linked with almost any CRM system, so every relevant person is up to date with his or her clients. If we look at a MiFID adjacent regulation MAD/MAR (Market Abuse Regulation), Insightful can significantly speed up case reconstruction in case of a Suspicious Trade and Order Report (STOR), because you don’t have to listen to all voice communication, but simply search written text.

Transaction Reporting.

Transaction reporting is especially burdensome for large institutions that deal with various asset classes on many different exchanges, including many different clients. The highest penalties for not complying were, not surprisingly, given to international investment banks, with Merrill Lynch topping the penalty list, with a fine of around 13 million pounds, for failing to report transactions between 2007 and 2014. And this was MiFID I, with a much smaller scope in terms of asset classes, number of different trading venues and fields to report. Also, under MiFID II, the penalties increase, in the UK even by 50%, according to the FCA. But again, how to deal with these challenges? How can large banks, with all their legacy systems, many different business lines, scattered over many locations in Europe and beyond, have a system in place that automatically captures the data for every relevant field under the transaction reporting obligation? Because this challenge is considered a compliance risk, the solution is often outsourced to consultants who offer intelligent products, like for example Nex Abide Financial, that offers a smart solution to comply. Nothing wrong with that. But, and that was the reason of this article, what if we look at the challenge from a business perspective? The challenge, obviously, is the accessibility and integration of data from many different data sources. And instead of having hundreds of consultants building yet another data warehouse, or integration platform, or something else that takes data from several places to be put into a legacy-to-be system; build or buy something that makes all your data truly accessible without the need of first moving data. Too good to be true? Maybe not. Take a look at a company called FraXses. This company has built software that connects to every data source or database within your company, no matter what structure, size or location and creates a meta-data framework that will give access to all your data as if it was stored in one location, in one format. Because it uses machine learning models that automatically learn the connections between different data sources, it takes a way over 80% of development and is able to deliver the solution very, very fast. Consider for a moment what you would do when you have access to all the data within your company…

 

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MiFID II: regulatory burden or a driver for innovative change?

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