MiFID II: The Force Awakens
Posted on Wednesday, November 9, 2016 by David Woolcock — No comments
Well, not quite. But ‘MiFID II’ is the next installment, which actually doesn’t seem to be causing quite the storm as its predecessor. However, how will ‘MiFID II’ impact your organisation?
It is transparency and efficiency that many regulations around the world call for banks to deliver; it is pain, costs and questions like ’what does this mean to me?’, that banks experience. ‘MiFID II’ is no exception. Last month, the European Securities and Markets Authority (ESMA) published the final draft of the 552-page Regulatory Technical Standards document, which is bound to impact organisational, regulatory and customer processes. Participants are changing their behavior in a number of ways and starting to ask what exactly these new regulations will mean for them (or they should be).
Back track to 2007 when ‘MiFID I’ was implemented, and you could see banks painfully upgrading or replacing key systems or finding out that their legacy software providers had gone out of business. This left banks vulnerable, without support and forced to turn to reporting solution vendors. These vendors didn’t understand the market and sold the wrong solutions to banks. The only options some providers would offer involved completely replacing existing systems with untested technology leaving banks exposed.
Now ‘MiFID II’ is rapidly approaching, banks are looking to bridge the gap between their mission critical systems and their reporting capabilities. However, many banks are questioning if ‘MiFID II’ will impact them and therefore delaying taking action.
The impact of MiFID II on banks
The FX and investment markets have more transactions processed per second than many of the markets addressed in ‘MiFID I’ had in a week. This requires high-performance systems with real-time capabilities and, therefore, high-performance reporting. The changes in guidelines mean much more than adding a few reports to the auditing procedure – it changes the whole regulatory process.
However, we have learned from ‘MiFID I’ that vendors didn’t understand the market and many banks implemented the wrong solutions. Therefore, it is not a simple case of upgrading your back/middle and front office systems given that the systems impacted are business-critical and ‘MiFID’ regulations by their nature affect core processes and expectations. Also, the additional volume of data required to comply with ‘MiFID II’ could result in the need to invest in expensive additional storage space on already overloaded back office systems. How do you get a back-office platform to capture best execution data from price streams offering sub-second price & benchmark updates when it’s not even connected to the trading venue?
Many banks implemented CRM solutions as part of their ‘MiFID I’ solution. When implemented correctly, these provided invaluable insight into your clients and their behaviour. However, banks found that each organisational division categorised clients differently, making reporting complicated. In MiFID II, the new guidelines will allow different divisions to understand customers better and improve reporting by providing a master customer segmentation model across the entire bank.
While it is important for banks to understand their customers, it is equally important for customers to understand their banks. Increased transparency is a keystone of the regulations being implemented by the European Union. ‘MiFID II’ introduces new market transparency requirements, with both exchanges and market participants being impacted. The EU’s goal is to give customers clarity when considering their investments. Under ‘MiFID I’, affected firms found that customers who understand your decision-making processes can be more loyal.
‘MiFID II’ aims to protect customers and ensure fair play, however recording all the data needed to prove that, and especially to prove best execution, means recording all margins, channel charges, offered rates and benchmarks leading up to a deal being struck. Given the nature of the assets being targeted under ‘MiFID II’, the amount and complexity of data needed to prove best execution is significant; one deal may result in the recording of multiple rates and benchmarks. And, what if a client leaves an RFSQ open for several hours? Do you want, or even need, to record every single quote, benchmark, margin data, etc.? The ability to record every piece of tick data isn’t a natural fit for a back-office solution, reporting tool or a CRM. Choosing your ‘MiFID’ solution means looking for the right tools to complement your existing regulatory reporting systems.
Quote-driven markets such as fixed income, currencies and commodities also feature extensive voice trading, a model not often supported by software platforms. Being able to record all your communications up to and beyond the point of trade adds to the quantity of data being recorded. Whilst this data is needed to satisfy the regulator, there is an up-side: being able to trace all contacts and analyse outcomes can help banks understand their customers and therefore provide a better service.
So perhaps the thought of upgrading your back-office and key systems reminds you of the pain of implementing ‘MiFID I’. Choosing the right solution means considering all of your options. You may choose to investigate the solutions offered by your back office vendor or your current reporting partner, but do they truly understand the requirements of your market? One indication that they might not is if they attempt to simply extend their current solution as a ‘patch fix’.
It is essential to invest in a tool that will not only ensure you are compliant but that will also enhance your customer service, your transparency and your efficiency. Ensure that you speak to experts in the field and get advice that is relevant to your business. So it seems, after all, ‘MiFID II’ is indeed a force impacting many banks, are you ready?
For further information on ‘MiFID II’ or to discuss the potential implications for your company, please contact us. Or request a demo of our banking solutions: