RegTech Intelligence 
Julia Schieffer, the founder and editor of DerivSource.com, recently interviewed PJ Di Giammarino, CEO of JWG Group, on some of the key stumbling blocks of MiFID II requirements.
Extracts from the interview detailing issues on reference data, the transparency principle and how financial institutions are implementing changes can be seen below. The full transcript and podcast is available here.
With MiFID II’s ‘non-equity instruments’ including derivatives, there is industry concern whether the regulations take sufficient account of the specific challenges regarding complexity and liquidity? What is your response to that?
Clearly, there’s a lot of concern in the industry. ESMA has been working on the standards for a long time and taking on board a lot of comments, but there’s still a few things being nailed down.
Ultimately, the definitions as they’re written are difficult to interpret, but they’re not impossible. Whether something is traded on a trading venue and how it needs to be reported and to what extent it is liquid, are things that are obviously solvable, but the challenge is to work out how to go about doing that on a day-to-day basis from 3 January 2017.
So firms are beginning to look very carefully at how they go about the classification of the instruments they trade, how do they identify them, how they go about digitising the workflow and the trade flow, and making decisions about how they’re meeting the various obligations.
Let’s talk a little bit about the transparency principle. How will the transparency principle, which reaches from price publication all the way to trade execution, impact the way the OTC derivative markets function?
We talk about transparency as if it were one thing, but actually there are many moving parts to it, and there’s a well-known transaction reporting regime that’s getting a lot more complicated.
From a business point of view, it’s more about the pre-trade transparency and the immediate post-trade transparency, because that’s where market data and pricing information actually will be visible and it can fundamentally change the market.
Obviously, the discussion about how do we get the right instruments and how do we get the right view of all our traded venues, including all of the new SI regime and how that’s going to play out, is going to be a key question, and there are many, many questions at the moment about how all the data around execution is going to be not only published but consumed.
Everybody in the market now has many more obligations, in order to go about the actual trades that they are now being asked to do.
Was that a surprise in the recently published RTS?
Fundamentally, yes, there have been some changes to the way the regime is happening. It seems to be maybe a little bit more doable from an OTC perspective, but there’s still fundamentally some big questions in there. One of them I think you touched on earlier is the reference data. A lot of concerns about how do we identify the instruments. We have an ISIN question, we have an AII question; it all has to line up to this great new reference utility that ESMA’s building, as we have to be able to track everything that moves across the market.
Now, sticking with reference data, how will the requirements around reference data proceed given the lack of standards in the OTC derivatives industry?
The way the tactical standards read, you need to be able to have very firm governance procedures around everything that you’re offering to a customer; you have to think about how you’re targeting a specific market and what kind of customers you’re bringing these products to.
Before you even then look at the impact and monitor what the consumption is there’s a whole discussion about “who are the classes of customers that I find appropriate” and “how am I identifying them, how am I linking them together?”.
Because a lot of this will be very complicated, especially for big firms that have lots of different hats with different types of SI obligations or the OTF / MTF crossovers. They’re all trying to now work out an awful lot of complex decision making, and the days of being able to do that on a spreadsheet and on the telephone are probably well behind us.
Let’s switch gears and talk a little bit more about implementation. Now, MiFID II and MIFIR overlap with a lot of other regulations. What would you suggest firms should be doing to prepare for the changes and what should they be prioritising in 2016?
There are literally millions of paragraphs that you have to look at with MiFID II and its interdependent regulations. What implementers really need to do is get owners for those paragraphs in a thematic way, assign them to people that are going to make the decisions about what they’d like to do about it. And to make those decisions they really need to take on board the philosophy in the way the regulators are thinking about what’s different in 2017.
So it needs to be something that, though we’re conducting business a certain way today, I’ve got an eye to the future and I’m thinking about interpreting all of those various requirements. And what that means for, not only my customers, but all my suppliers up and down the chain, because there will be lots of new ways of thinking about how I can go about satisfying those obligations and some of them will be more attractive ways to clients than others.
In terms of what you’re seeing amongst market participants, about how they’re already starting to prepare, or they will do in the next year, talk to me a little bit about what you see them doing in terms of owning specific areas of implementation or how they’re structuring it as you mentioned with governance etc.?
There’s no one answer because every firm organises itself slightly differently, but those leaders that we see out there, which could change the bank programmes, are clearly segmenting those issues according to the types of skillsets in owners they need in order to line up against the business and make appropriate decisions.
Our MiFID Implementation Group has a variety of folks that come to the various topics that we hold; if we’re talking about a pre-trade or maybe a post-trade transparency issue, they’re making sure they get the business analysts and the CEOs that are close to those desks there to talk about the operational issues and how they’re going to perform common policies.
At the end of the day, it all gets down to knowing your deltas, and the deltas are twofold. One is “what did MiFID I say?” and “how did I implement MiFID I?”, then what’s happened between MiFID I and today. Because only then do I know how I’m getting ready for MiFID II and I need to think about my global operating model and what matters where from the way that I’m running it.
So those deltas are key, and knowing where the interdependencies are cross-regulations and cross-regimes is important to be able to formulate a plan to get the thing done right, because, as we well know, we’re only less than 64 Saturdays away from implementation.
Let’s talk about solutions, are there existing solutions or do new ones need to be developed in order to help institutions prepare for MiFID in the future?
Absolutely. The great news is that we’re now in an age of Fintech where lots of investment has been made in these companies and platforms where they can actually bring new things to market.
Obviously a lot of our old partners are still there, trying to figure out how to use the same new technology, so it’s a very, very interesting landscape as we watch the ARM & APA races and how they’re going to figure out down-managing all of the transparency and the post-trade transaction reporting.
All of these kinds of things are very, very fundamental to the whole industry in that they need to get on a common standard that everyone says is good enough. So the great thing about people coming together on these common solutions is that they can then get to what becomes acceptable industry practice and that can evolve as the requirements become more clear.
You have a special interest group that focuses on MiFID II, what are their concerns and where is their focus now and for the next year?
The special interest group is implementation-oriented, so it’s really the programme managers of the largest firms trying to work out how are they going to get it all done in time. So obviously there are some things that aren’t as clear as others, but what they’re looking at is really how do we get to clarity around what we need to do to solve the problem. As soon as we know it’s solvable, we can then start the project to actually do something. So we’re getting away from what it could mean and turning that into what we actually are doing.
Currently, all of them are trying to make sure they have a comprehensive list of obligations that they can check off against the fact that they’re going to meet them all in various programmes. This is where having a platform, like RegDelta that allows you to wire all that content into accountability by owner, becomes critical.
At the end of the day, collaboration is key, that’s one of our core principles, that’s what we have always set out to do. We’re bringing the right people together around the topics with a governed and controlled view about what needs to happen so that we can get there on the 3 January or whatever the new date may or may not be.