In fewer than 230 days – 7.5 working months from now, the biggest regulatory change since the 2008 financial crisis is set to come into force. The legislation, Markets in Financial Instruments Directive/Regulation (MiFID II/R), is one of Europe’s most ambitious and far-reaching financial reforms and is estimated to cost the financial industry billions to implement.
By redefining the European legislative framework to regulate the operation of financial markets, MiFID II/R will significantly impact financial institutions providing services in the EU. The legislation is no mere sequel, it is a fundamentally new set of rules that will be introduced by making changes to the existing law, the first Markets in Financial Instruments Directive (MiFID I), which came into force in November 2007. MiFID II/R will leave no stone unturned, obliging firms to meet new requirements governing investor protection, trading, reporting and systems and controls.
With this in mind, financial institutions are trying to find the smartest ways to comply. One way in which some firms have found their path up the MiFID II mountain is through collaboration with others, which could make the compliance process facing an upcoming deadline much easier.
Collaboration in action
Solving for any regulatory change requires a great deal of resource and, in some instances, major technological investment. For those trying to meet the MiFID II/R requirements it is clear this is no exception. The new legislation will impact several areas of the financial industry and will pose many implementation challenges for firms. From experience, market participants are aware that meeting these regulatory obligations on an individual basis can prove very costly, and this is where a collaborative approach can come into play.
One example of collaboration in the industry is the establishment of Project Sentinel, which launched in 2016. A group of banks proposed this solution to mutualise the cost of MiFID II/R implementation. Its aim is to enable market participants to pool their resources by investing in a ‘standards-based and MiFID II compliant’ technological solution that should be able to automate the regulatory business processes for the front-office.
JWG can also make the process of compliance to MiFID II/R much easier through the collaborative effort of our MiFID II Implementation Group (MIG). The MIG is a JWG-facilitated weekly meeting of industry experts who are all directly involved in MiFID II implementation. The group engages in collaborative issue identification, standard setting and guidance. Along with this groupwide communication that provides a Q&A service of regulatory questions, we provide access to our MiFID II instance of RegDelta, which includes tagged and annotated MiFID II documents, complete with reference interpretations. More recently, JWG and members of the MIG have been working on the production of guidance notes, for example on systematic internalisers, research and inducements, which provide analysis of key issues and operational direction on how to solve them. This year, the MIG roadmap is shifting towards implementation and it is looking at several ways the industry can obtain clarity through collaborative means.
These are just a couple of examples of the many ways in which firms can chose to collaborate and there are rumblings of other efforts currently underway on a number of fronts. Even so, some firms may wish to go at it alone. This decision will depend on a firm’s business model and the amount of time left to comply. But, there are benefits to collaboration and the collective effort of the group can find a functional and efficient solution that minimises costs and risks for all those involved.
Redefining the platform using technology
MiFID II/R looks set to impact several areas of the financial industry and will cover everything from trading, investor protection, transparency and reporting. Furthermore, the new requirements may impact existing technology within each of these areas and may call for firms to implement the technological solutions to enable compliance.
For example, to comply with the enhanced disclosure requirements surrounding costs and charges, and to ensure consistency across the business, firms would have to implement homogenous practices across all lines and desks. For this reason, firms within the financial industry may wish to consider establishing a technological platform or client portal through which a firm could send costs and charges disclosures. Whilst firms may wish to send disclosure in a durable, medium, e.g., email the ex-ante or ex-post costs and charges report, because of the ever-changing nature of regulations, they should look at implementing long-term flexible solutions.
There is a small window of time left for technological change prior to the implementation deadline. The changes that MiFID II will impose mean affected firms should carefully determine their implementation measures and consider the variety of technology solutions available in the industry.
Best practices in advance of January 2018
Many firms are well underway in their MiFID II/R project plans and should be in the process of moving from the ‘thinking and preparing’ stage to the ‘implementing and testing’ stage.
However, complying with MiFID II/R is only one piece of the regulatory change puzzle. Doing regulatory reform regulation-by-regulation is tough, the requirements are many and taking them one-by-one wastes time and requires changing course every time a new requirement is identified. For MiFID II and other interdependent regulatory regimes, firms should have already reviewed current and incoming regulatory changes, understand which are relevant to their business models and know how to apply them.
The task is significant, but handled structurally and strategically, economies of scale could be achieved, plus this integrated approach across regulatory initiatives will lead to more efficient implementation. Other regulations will be asking for some of the same steps and there are many common and recurring themes. Smart approaches will embrace this – and the inherent interdependencies – and avoid covering the same ground repetitively. Not only this, businesses can leverage the new requirements to deliver an enhanced customer experience and, ultimately, drive competitiveness.
Taking into account the likely large expenditure within this space, firms should focus on implementing in the most efficient way possible, that is to say getting MiFID II right the first time, otherwise increased budgets will be requested each time new policies are tweaked or new systems builds need recalibrated.
Want to find out more?
Want to discover more about the issues addressed in this article? JWG will be facilitating the discussion at our RegTech Capital Markets Conference on 28 February 2017. The panel on ‘MiFID II compliant trading’ will tackle this head on, and will feature leading figures in this space. If you would like to join over 50 firms and talk to industry leaders about these problems and their solutions, you can sign up here.
With over 300 registered attendees and keynotes from the European Commission and the European Central Bank, JWG’s RegTech Capital Markets Conference on 28 February features in Business Insider’s list of the World’s Best RegTech Conferences to attend in 2017.
JWG are here to help!
MiFID II implementation risk levels are high as very broad and deep obligations could be implemented in a variety of different manners. Luckily, we are here! JWG facilitates a weekly meeting of industry sell-side experts who are directly involved in MiFID II implementation in our MiFID Implementation Group (MIG). The group engages in collaborative issue identification, standard setting and work planning. The meeting operates under the Chatham House Rule and all members are protected by our collaborative agreement. If you would like to find out more about this group, please contact firstname.lastname@example.org.
Further to this, to deepen the discussion on RegTech, JWG will be running a series of new special interest groups, covering:
- Trade surveillance. What can be traded, where it can be traded, which types of firm can trade it and what systems are needed to do so
- Client management. The holistic obligations of KYC regulations on client data
- Reporting and reference data. Reporting to regulators including, but not limited to, transaction reporting formats, standards, collection mechanisms and holistic data models
- Data and security. Data security, privacy and associated technology risk and risk data requirements from a wide range of regulations.
If you would like to find out more about the groups, please contact email@example.com.