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MiFID II: here I come, ready or not …

JWG analysis.

The second round of MiFID II consultation has officially ended.  As we have previously noted, the tone from the recent hearing was that, despite more consultation due on some of the fine print, we are largely done discussing the standards and can now begin to start thinking about how to implement them.

On that score, we were pleasantly surprised to see that ESMA has released millions of Euros to fund their MiFID II 2015 IT projects.  Their countdown has started.  Has yours?

One key message we are hearing at this crucial juncture in the MiFID II process states that you cannot afford to implement in isolation.

Ignition sequence commenced

The longer term strategic thinking around systems architecture, supplier management and industry utilities that ought to be happening within operations, technology and data is counting down to lift-off now.

Last week, ESMA had an appropriate message on the tannoy:

“… be aware that there is no transition into the new regime, the new rules will apply, with only some minor exceptions, fully as of January 2017   …  This gives you just one year to get ready for MiFID II, to adjust your internal processes and systems, to train staff, and to inform your clients”.

Interestingly, we hear that, unlike MiFID I, some of the member States who are traditionally behind in the implementation sweepstakes are making similarly tough statements.  With this kind of broadcast, you can be sure that your regulator will come knocking with very detailed questions a lot sooner than you think.

The point is that the rules will be finalised in due course – but they are largely there already.  The challenge will be to decide what they mean for you, how you will pick your path to delivery and how to present senior management with a new, tested and de-risked operating model in time for the December code freezes of 2016.

Where are we going now, Commander?

MiFID II ‘project lead’ is not a job for the faint hearted.  With thousands of pages to consider and scores of dependent regulations, the programme is really getting under the skin of the industry.  In particular, the scope of what is shared with regulators, investors, customers and the public is causing a large amount of concern.

Perhaps more worrying than the regulators are the conversations with your peers, your suppliers and your markets.  If you don’t get started this quarter, you’re unlikely to be ready to participate in integrated system design and testing with fellow market participants.

We estimate that unit, system and integration testing for market-wide requirements like pre-trade, post-trade and transaction reporting could take at least two quarters.  In a similar vein, getting your counterparty to agree to new classifications, terms of business and other bits of paper could take longer than that.  Depending on your workstream, MiFID II deliverables could be flying out the door in as few as 350 work days from now.

What does it look like when we get there?

As we have argued for some time now, it’s all about the standards that the industry uses to define ‘how’ a clause is implemented.  MiFID II will require alignment of thousands of data points and practices, yet there is no agreed regulatory policy, process or data architecture in place.

For example, one might identify traders with method A, B or C.  These methods could involve different codes, business processes and vendors, whatever … let’s just presume they are thought through.

Your management wants to know which one is right.  Wouldn’t you rather have a discussion, starting with the wisdom of the crowd about what is possible?  Wouldn’t they want to have the security of knowing that the list of options was a) fit for purpose, b) relatively complete and c) likely to be achievable?  Wouldn’t you both want to know that your suppliers could deliver the solution you wanted and that the regulator would find that acceptable?  This is where regulatory implementation standards come in.

Is your countdown checklist ready?

There is no single checklist for the whole industry.  Every firm needs to take a long hard look at what they do today and how it will need to look in January 2017.

In our last 18 months of research, we’ve described the variety of stakeholders (or tribes) involved in the MiFID II mission and the types of decisions that they need to make in 2015.  The list below shows a sample mix of strategic, tactical and operational items for your punch list.

Example MiFID II countdown checklist

Decision maker	Objective	Examples decisions required
Board	Create shareholder value	What products will the market bear short, medium and long term? How will customers react when they realise 5-year deals may need to be repriced? What strategic capabilities do we need to be best at?
Legal/secretariat	Keep out of jail and conduct business profitably	How will your business be classified (e.g., SI)? What legal structures will be used (e.g., for DEA, 3rd country activity)? Are our controls proportional? Who owns the relationships – you or the distributor?
Operations/data	Streamline the ‘end-to-end’ target operating model	How will we classify our clients and prospects? Are new client agreements required to cover best execution? How do we track LIS thresholds by product? How do we streamline production of many different reports (e.g., staff identifiers)? What KYC capability needs do we have for our utilities?
Technology	Get the right systems in time	Do our algo suppliers meet our timestamp and circuit breaker requirements? Can we handle the new record keeping controls? What new market/reference data management is required Is our infrastructure ready for SI obligations
CAO	Keep cost/income ratio in line	Can we afford to maintain current businesses? How do we incorporate MiFID II changes into other change programmes? How does our staff stay on top of the mountain of implementation standards for 2+ years? How do we manage market-wide initiatives with our peers, market infrastructure and suppliers?

Are you part of the mission?

JWG was founded to help firms and their suppliers meet the challenges of regulations like this.

Since MiFID I in 2005, we have run over 80 separate workshops with experts on regulatory trading implementation.  Now, we have launched:

• The RegDelta MiFID Programme Planner to help enable a smart approach to navigating the thousands of pages of MiFID II requirements
• The sell-side MiFID Implementation Group (MIG) to deliver the industry’s implementation standards
• Our ground-breaking regulatory implementation training for MiFID II. Find out more about the 24 March course in London here.

Nobody can to go into space alone.  Make sure you prepare the team and collect the tools required now to ensure a successful mission from lift-off.

For further MiFID II debate and discussion join MiFID II: The working group from JWG on LinkedIn