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Doing MiFID II right – shaping your what AND how

JWG analysis.

In our last article on this topic, we spelt out our views on regulatory implementation standards.  And the first standard that needs to be defined is how you’re going to organise your work programmes.

The shape of your MiFID II programme

MiFID II is far beyond just a few ‘tweaks’ to MiFID I.  So much so, that one of the first challenges will be ‘how are you organising the work?’

The simple fact is that there are only so many ways to cut regulatory change topics into units of work to be done by the right kinds of people.  Of course, as we note in these pages far too often, it’s not just about MiFID.  We have over 30 different legislative initiatives, like the German and French HFT acts, that need to be considered too.

But how do you group all of MiFID and all of the interdependent initiatives?  Well, after much consultation and debate, we’ve settled on 5 core workstreams, each with standards opportunities:

• Market structure.  A workstream to cover the new market infrastructure.  Key standards include how to operate like and identify Systematic Internalisers (SIs) and how to consume consolidated tape (CTP) data.  Interdependencies include Volcker, PRA ringfencing, EU BRA
• Trading.  A way to manage new rules relating to trading.  Key standards include how to identify algorithms and what kind of microstructural controls will meet operational risk’s needs.  Interdependencies include EMIR I/II, UK competition review, SFTR, G20 Tax CRS
• Reporting.  The mother of all data management challenges.  Key standard challenges include what is reportable, who reports and how and how to fill in the fields.  Interdependencies include EMIR review, MAR, REMIT, SFT, EuVECA
• Investor protection.  A workstream focused on improving fairness and conditions for customers and investors.  Key standards include more client classification, financial promotions and new best execution rules.  Interdependencies include DE Kleinanlegerschutzgesetz, CRD IV, CASS, DE banking separation act
• Systems and controls.  Includes requirements relating to governance and structures.  Key standards include new record keeping requirements and new authorisation rules.  This workstream is also primarily based on text from the directive.  Interdependencies include FCA/PRA accountability, BRRD and PRIIPs.

Of course, there are also the streams which cut across these: data, technology and client data management.  Stay tuned for more on those later …

As MiFID II transforms the trading landscape, it will affect all parts of the industry.  We don’t yet know how it will all look as the buy-side, sell-side and market infrastructure people are still considering how they want to change tack and which business approaches they should adapt.  What we do know, however, is that no 2 firms’ implementations will be the same.

Planning lessons

For MiFID I, JWG ran over 60 workshops; by the end of this year we will have run just a dozen MiFID II workshops.  What’s different this time around and how should we learn from previous efforts?

1. Focus on the sharks nearest the boat.  Unlike its predecessor, MiFID II will be implemented alongside 30+ concurrent initiatives.  As noted above, what happens in DE, FR and UK will ultimately help shape the decisions taken for Europe as a whole.  This means that, if you are conducting business in particular jurisdictions, you will be forced to implement some requirements in advance.  In other words, your MiFID II priorities may be set for you.
2.  Swim in safe water.  Given that work has to start without the full picture, it makes the most sense to start with the requirements which are the least likely to change, i.e., the ones in which we have higher confidence.  A good indicator of certainty will be the location of the requirement.  If it was passed as regulation, i.e., MiFIR, it will be applicable uniformly across the EU, whilst MiFID, the Directive, will be interpreted along the way by 28 different regulators.  This doesn’t mean you can’t get started on Directive requirements, but you’ll need to keep a close eye on what could be ‘deltas’ across Europe.
3.  The devil is in the deltas.  Some MiFID II requirements will already have been implemented in other, non-EU, jurisdictions.  Where solutions for regulations like the Dodd-Frank Act can be copied over, it makes sense to leverage them.  But beware, because you will need to confirm that the solution is fit for purpose.  I would be dangerous to think that, because they are similar, the requirements will be the same and that to comply with Volcker, for example, will suffice for MiFID – it won’t.

Conclusion

Like last time, it will be nearly impossible to get all of MiFID ‘right’.  You can, however, plan now to be more successful than your peers and keep your firm from being perceived to be ‘off-standard’ or ‘relatively red’ in the eyes of your customers and regulators.

JWG are hosting one more MiFID II workshop in 2014.  On 4 December we will focus on the systems and controls workstream.  If you are interested in being involved call the JWG team on +442078708004 or email MiFIDII@jwg-it.eu