Article
Your path through the MiFID II jungle

JWG analysis.

The industry returned after the break knowing that it had fewer than 500 working days to implement MiFID II but found over 2,000 pages of new text to read.  Even worse, the grapevine whispers that more is due out this month.

As we’ve written before, organising and planning is the order of the day.  How can you impress the bosses and get your firm on the road to safety this quarter?

The landscape

Having had a careful read through the new text, we conclude that a few of the major operational issues have been eliminated.  And a few of the practically ridiculous asks – like inspecting clients’ algos and identifying whether a transaction was a buy or sell – have been removed … phew!

Of course, the euphoria of an operational ‘victory’ wears off quickly when one realises that this means that there are many more areas in which very little is likely to change, despite the fact that we are now in another round of consultation.

Charting all this territory to determine where each individual part fits into the bigger picture is no easy task – we’ve been at it since 2 January and our experts are still finding new swamps to put on the map.

Coming back with fresh eyes, we are quite impressed with how many decisions now appear to have been made.  This means there is plenty to get on with – and that starts with finding the least slippery implementation paths through the 23-month change programme.  So how do you get famous for MiFID II this quarter?

Five safe trails

First, let’s map out what exactly it is that ESMA have published.  The total of 2,069 pages comprises 4 documents; the Consultation Paper at 645 pages, Draft Regulatory Technical Standards (RTS) totalling 520 pages, 446 pages of Technical Advice to the Commission and a 458-page High Level Cost Benefit Analysis.

From our experience over the last decade of MiFID planning, the key now is to shape the programme around those requirements which are least likely to change, i.e., the ones in which you have higher confidence.

If we can all get talking about what programmes of work we are scoping this quarter, we might just have a chance of navigating a way through the ‘jungle’ in time to meet the immoveable implementation deadline of January 2017.

In broad brush, we see MiFID II driving five main trails:

1. Conduct: Looking at the draft standards, it is increasingly clear that MiFID II will revolutionise the way the customer is treated and the firm behaves.  ESMA and the Commission are taking a view that national standards and guidelines should be harmonised to the extent possible and that prescribed conduct rules are necessary.  This is particularly the case with new rules around the suitability and appropriateness of financial products, much more advanced best execution requirements and restrictions regarding the purchase of research.  As with a plethora of KYC regulations in play this year, taking care of your customer will become an even bigger headache by 2017.  As any firm knows, a disproportionate effort is required to ‘go back’ and repaper, re-inform and re-educate its clients and the markets.  Lots to get on with here …
2. New market standards: ESMA are throwing their weight behind new standards that will have a dramatic effect on how the markets work.  A decision has been made that a robust framework for classification of non-equities is required – the so called COFIA, or the classes of financial instruments approach.  While some will find this commitment from Paris encouraging, many see it as overcomplicated and too broad in focus to manage liquidity thresholds.  ESMA have also now made it clear that they will be putting the weight of MiFID II behind the LEI project, removing the option of using BICs to identify clients and putting explicit obligations on firms to ensure that the identifiers are right.  Oh my …
3. Trading: A greater proportion of trades will be on exchange, which will require certain derivatives contracts to be traded on a venue, creating important interdependencies between MiFID and EMIR.  New algorithmic trading rules are looking likely to remain vague, as ESMA have again reaffirmed their reluctance to provide detailed definitions, and so throwing ambiguities into the rules as they stand.  Best to start coming up with your own definitions and mind the gaps!
4. Transparency: In the second part of the response to G20 commitments, MiFID II extends the trading obligation to cover all instruments – meaning the definitions of ‘liquidity’ and ‘pre trade’ are attracting a lot of attention from traders.  Much of the operational focus has been, and will continue to be, on 81 new transaction reporting fields, but just as important a part of MiFID II transparency will be public disclosures for reference data.  Not only will the new definition of systematic internalisers continue to cause headaches within a firm, the reference data implications will create challenges for the whole market.  Good chance of getting stuck on this one without common practices …
5. Enhanced SYSC: The UK concept of each firm maintaining robust ‘systems and controls’ will be much enhanced by 2017 with an expanded role for operational risk functions and microstructural controls aimed at curbing algorithmic trading related risks.  Despite ESMA’s commitment to these (read minimum tick sizes and kill switches), much of the ‘how’ remains unclear.  Regardless, though the business may not want to engage in the requirements, they’ll thank you for getting in front of what are, inevitably, big drivers of the cost income ratio.

At the end of the day, each firm will need to know what is required for their business, customers and suppliers first, before committing serious resource to making changes.

Your guides to get you through

Regardless of how you map out your path, a focus on implementation is required to shape the acceptable methods for meeting the requirements.

Of course, keeping in mind that JWG is a think-tank, not a charity, we won’t yet be releasing our treasure map on RegTech.  However, we do have the tools to help you through.

We are running a full trading regulation programme this year through training and peer-to-peer benchmarking, while our RegDelta analysis tools can help firms and their suppliers to:

• Know their requirements and the deltas between them
• Understand the timing, linkages and dependencies
• Identify the risks involved and make the right choices.

CDMG’s 2015 inaugural meeting on 22 January aims to help those of you at the coalface sort out what matters most in MiFID II as one of the 40+ new pieces of regulation.  We will shortly unveil news about our MiFID II groups for 2015 as well.

Stay tuned for our perspectives later this month and get in touch with the team now if you would like to join in the path to safety.