12 December 2017
Umesh Patel

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Umesh Patel - Revista Systems

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MiFID II, DAY II: Enforcement, Mitigation, Systems, Productivity

10 November 2017  |  3322 views  |  0

If Day 1 is January 3 then Day 2 is any time after that. Implementing systems day 2 may be prove to be a smarter way to invest in compliance and productivity.   

European market regulators will go-live in two months. We look at possible approaches to enforcement by regulators plus mitigation and productivity strategies for firms involved.

Background

Since the implementation of earlier legislation such as MiFID I and EMIR regulators have been imposing progressively larger and more painful fines, increasingly making sure the market is aware violations won’t be tolerated.

Recent sanctions imposed by the FCA include:

The list is long and, as this article from Bloomberg demonstrates, the tendency has been an increasing appetite for sanctions post legislation.

MiFID II looks like being one of the most fundamental legislative changes to the financial services industry ever. The legislation contemplates nearly all participants: buy-side, sell-side, broker, IDBs and trading venues. European firms are most exposed but many in the 

First Breaches – Soon? / Transaction Reporting

How long will it be before firms are fined for breaches?

Historically regulators have provided what appears to be a ‘grace-period’ and chosen warnings ahead of enforcement early on - permitting some flexibility for small breaches and quick resolution of problem areas. And, as the above examples show, they always have an appetite for mea culpa!

Early chest-beating by regulators indicated immediate enforcement and zero tolerance. More recently industry observers have noticed a softening and even some concessions to the complexity of the task ahead.

The FCA has ruled out even moderate extensions to the implementation deadline as discussed in this article, indicating as well that their enforcement would be immediate and targeted.

On the basis of what has been reported as said, enforcement will commence immediately after the go-live, and penalties for breaches not far behind. Presumably one or more of the various forms of transaction reporting will be targeted initially, on the basis that the FCA has visibility to the reported data.

Mitigation Strategies

One thing is obvious: transparency to regulators and demonstrations of intent would go a long way in the quest to mitigate penalties and other sanctions. In addition to prompt delivery of requested data, (communications, electronic logs, counterparty information or trade reconstruction information), effective monitoring and oversight of market conduct within the firm will be essential and most firms are responding to this.

Policy

Establishing a clear defined internal policy looks important. Training and education will result in good market conduct and adherence with existing and new rules. Under existing regulations there is already focus on market conduct and the provisions in MiFID II stress this tenant further.

I can’t think of another industry where minimum profit is mandated the way the Best-Ex provisions are laid out in the legislation. Notably, minimising trading profit conflicts with current remuneration packages and so sound internal policy probably needs to extend to a corresponding remuneration policy to manage this.

Responsibility

Recently the Securities and Futures Commission (SFC) ruling against Mr Xu Tao (Xu), a former investment consultant of China International Capital Corporation Hong Kong Securities (CICC). Xu, who used his mobile phone to take order instructions in violation of CICC policy (also SFC policy to record all order instructions) was not permitted to re-enter the industry for four months. He was responsible for his conduct and sanctioned personally in breach.

Just to ‘up the anti’ new provisions under the BoE PRA ‘Senior Managers Regime’ (see Deloitte article) senior staff are now individually responsible for behaviour in their bailiwick. In defiance of gravity, perhaps the brown-stuff won’t flow downhill and senior executives will need to be much more responsible for their own staff.

Personal responsivity by senior staff is now more tangible and the extraneous impact to individuals are much higher. Adverse actions of staff will be monitored by the company’s own surveillance teams, as well as by the regulators – and detailed knowledge by senior staff of the actions and attitudes of their teams below them is the best way to reduce their personal exposure and their firm’s exposure to regulators’ conduct sanctions.

Systems

People need the right tools. With a renewed focus on market conduct rather than just trade reporting, new systems are required. These systems need to be capable of managing data in a pre-trade environment and both assist in the assessment of conduct and provide productivity uplift.

What Clare Walsh from Adesso Tech coins Legtech is a real issue for many financial services firms. And it appears, based on survey after survey, that most have not done anything to alleviate the problem for post MiFID II.

The January deadline does not mean it is too late to implement good systems. ‘Day 2’ implementation of systems may prove the best strategy, once the fuss is over and everyone gets on with it again. Additionally, new connectivity using SaaS, micro-services and APIs mean that tactical solutions are much more attractive than adding components to already outdated systems.

Systems’ architecture has changed to ‘best-of-breed’ micro-services and this can change compliance and productivity. Smaller, agile, systems such as Symphony, Slack, Revista, Salesforce, Microsft Dynamics can integrate easily with existing systems and databases using enterprise connectors such as Mulesoft and or bespoke integration tools based on SDKs (software development kits).

Conclusion

Despite how it might feel to readers currently in the MiFIDII trenches, there is life after January 2018. Due to the scale of legislation, we must assume that there will be some leniency or understanding by regulators about the size of the task.

The legislation is not only reporting based, but focusses on conduct. With better defined conduct requirements, there is more requirement than ever to create the right work place where staff can carry out their work and develop careers in a law abiding manner…

Fortunately the systems landscape has changed and the new environment means that better services can be implemented faster to complement legislation and improve productivity.

  

 

  

 

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job title Head of Product Strategy and Business Development
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member since 2017
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Revista Systems provides a fully compliant suite of products for the voice trading environment in an ever increasing Regulatory regime. My role is heading up the business development efforts and pro...

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