Complying with MiFID II/MiFIR Requires A Holistic Approach
MiFID II/MiFIR legislation, which will be enforced by January 2017, will significantly alter the ways banking and capital markets firms operate. Compliance pressures could potentially combine with the new regulation’s impact on business, people and processes to disrupt the European Union (EU) financial system in meaningful ways.
Broadening the scope of its predecessor legislation, Markets in Financial Instruments Directive (MiFID I), the upcoming regulation aims to make financial markets more efficient and reduce systemic risk, all while increasing investor protection and transparency. Most notably, MiFID II will expand to less regulated areas of the European financial system, such as instruments traded over the counter (OTC).
The European Parliament has endorsed the framework legislation, which is made up of two components: MiFID II and Markets in Financial Instruments Regulation (MiFIR). The framework legislation was published and entered into force in July 2014. Member states must comply by January 2017.
We expect MiFID II/MiFIR implementation to have significant market impact, including:
•Lower transaction costs
•Increased compliance costs, through increased transparency and reporting requirements
•Operational change, as businesses adjust to the heightened and extensive disclosure and reporting requirements
•Changes to business models, through restrictions on OTCs and requirements to deal through trading venues
•Changes to provision of products and services
•Changes to composition and remuneration of management
For firms to meet MiFID II/MiFIR requirements, we have identified several key areas that need to be addressed:
Corporate Governance. These regulations will establish a more transparent and responsible corporate governance system. Areas affected by the changes include management fitness and propriety, remuneration policies, policies regarding services or products and operations, complaints handling, corporate transparency and compliance functions.
Third Country Regime. Non-EU firms proposing to deliver investment services in the EU will have to comply with EU laws and establish an authorized branch in a Member State.
Investor Protection. The regulation’s rules and principles are designed to protect investors. There is enhanced regulation around best execution principles, disclosure and recordkeeping, and product governance. There are suitability and appropriateness provisions and rules around client asset safeguarding. Further, there will be a ban on inducements, changes to the execution-only regime, an unbundling of services, and product intervention.
Market Structure. The new market framework has introduced and amended many rules to establish safer, sounder, more transparent and more responsible financial systems. Broadly, these changes are in relation to authorizations from a competent authority, trading venues, tick sizes, Organized Trading Facilities (OTF), regulated markets/MTFs, algorithmic and high frequency trading, commodity derivatives, reporting requirements, resilience-capacity thresholds, recordkeeping, market-making agreements and open access to trading venues, central counterparties (CCPs) and benchmarks.
Transparency. New and amended rules on transparency will have a broad impact as well. Areas include near-real-time pre- and post-trade transparency on all trading venues, extended daily transaction reporting, additional transaction reporting (client ID, decision trader ID, execution trader ID, algorithmic ID) required of the investment firm, an approved reporting mechanism, and development of consolidated tape.
The EU’s Financial Conduct Authority has said it is not acceptable for firms to wait until the text has been finalized and that firms should start planning now for the “knowns” within the text. MiFID II/MiFIR is a wide-ranging piece of legislation that touches every aspect of a bank’s operations, front to back.
HOW CAN CSC HELP?
CSC can help you hold back the tide of regulatory burden and shift toward a more holistic, cohesive approach to compliance, underpinned by a more agile organization that is better able to absorb the effects of regulatory change. This approach includes the following steps/stages and methodologies:
Our Horizon Scanning methodology assesses the future regulatory landscape in relation to MiFID II/MiFIR and other relevant regulations, allowing you to anticipate regulatory change and devise an efficient strategy to ensure compliance. We will provide you with a 1 – 2 year regulatory timeline, commentary on status and risks, and a high-level heatmap showing overlaps and synergies with MiFID II/MiFIR and related regulations. These tools will empower you to make informed decisions on regulatory response priorities, develop strategies to achieve compliance and map synergies with other regulations.
Business Impact Analysis
Our Business Impact Analysis methodology is a process-centric and cross-silo approach that provides clarity around business impacts and makes your organization more agile in order to smoothly overcome any regulatory challenges. Our dedicated subject-matter experts will review MiFID II/MiFIR and related regulations, and help your organization understand the relevant impact.
We will provide an As-Is and To-Be model and high-level cost analyses, heatmaps showing business impacts and gaps to future needs, and recommendations on change priorities, including defined systems and processes. This will allow you to develop a qualified and quantified view of proposed changes to achieve compliance and a leaner, more agile and more functional business model.
Our Regulatory Response methodology is a portfolio management tool that identifies synergies, optimizes effort, and replicates and retains ability within the new regulatory landscape model, allowing you to adopt a firm-wide methodology and approach to address regulatory issues and changes.
We implement priority changes concerning people, processes and systems — setting up a MiFID II/MiFIR program or incorporating it within the existing regulatory change portfolio, rationalizing the current portfolio of systems and processes, and identifying redundant applications and processes. In doing so, CSC helps you take advantage of a leaner, more efficient and more accurate compliance portfolio, at a lower cost.
Data Capture and Monitoring
Our Data Capture and Monitoring methodology defines and implements a data management strategy, and then sources, extracts and validates the data to satisfy regulatory requirements. This provides greater accuracy around the right data and allows you to think more strategically about solutions for hosting and accessing data more effectively.
We determine gaps in your data models, create data retrieval plans, and then structure and host data to satisfy your requirements. We will provide you with a data dictionary, inventory, data governance standards and “data lake” model to support regulatory reporting, monitoring and data infrastructure. This consistent output from a single source gives you the flexibility needed for future data requests.
Our Reporting methodology develops, delivers and optimizes the MiFID II/MiFIR reports submitted to regulators. Going through this stage helps develop a more balanced risk management corporate culture, with greater transparency and accuracy using more effective monitoring and reporting.
We define the reporting suite in accordance with MiFID II/MiFIR, determine the appropriate reporting platform, and implement reporting governance. You will receive a defined reporting suite and configurable external/internal reporting output, allowing you to take advantage of a single, scalable data source that is configurable to your business needs.
It is important for the financial industry to be aware that there are synergies between existing regulations and MiFID II/MiFIR. The silo approach to tackling MiFID II/MiFIR, which has been successful in the past in dealing with regulation, is no longer appropriate or effective. CSC understands how to help your firm comply with the new regulations in a more cohesive, holistic way.