Planning for the unknown

Firms should start preparing for MiFID II

There has been much discussion around the delays to the implementation of MiFIR/MiFID II, officially announced on 10 February. The first sign that the delay was fact rather than market rumour was when the European Parliament issued a notice in November 2015 to say it had accepted the European Commission’s request for a delay to the enforcement of the regulation for one year. At the time, the industry drew a sigh of relief knowing that it had extra time to make the necessary changes to legacy systems and processes to comply with the new rules; however, many in the industry are now saying that for this extra time to be of use, the final Regulatory Technical Standards (RTS) must be issued sooner rather than later.

It looks like the industry could be disappointed with the latest timeline as while ESMA published a consultation paper on draft guidelines on the application of its final draft RTS, including transaction reporting under MiFIR on 23 December 2015 (with responses due by 23 March 2016), the Authority is not expected to publish the final guidelines until the second half of 2016.

With this in mind, our clients – compliance teams from the sell-side – said that it has no other choice than to continue to prepare for the January 2018 implementation of MiFID II/MiFIR based on a combination of the draft RTS (last published on 28 September 2015), insights from vendors, like Torstone Technology, information from peers and in-house knowledge.

Furthermore, market participants were hoping that given the delay to the publication of the final RTS, the regulators may recommend a phased approach to MiFID II. However, recent reports suggest that this optimism may be ill-founded as national regulators believe that different parts of MiFID II/MiFIR are closely linked and while the regulation will now be officially delayed for one year, regulators and policymakers believe that when it is implemented it should be done so in its entirety.

Further clarity around the timing and detail of the regulation was made public in February when the proposed changes to the law were circulated to the European Parliament and the Council of the European Union for full legislative review.

Whilst an official delay has been announced, most of our clients are telling us that they are preparatiing for MiFID II/MiFIR well ahead of 2018 because this approach will give them the requisite time for testing of the new systems and to ensure compliance with the new rules.

As we have highlighted previously, our clients’ biggest worries are around the new transaction reporting obligations of MiFID II and the amount of preparation which needs to be undertaken in order to comply with them.

These include concerns around the increase in the number of financial instruments which will become reportable under MiFID II/MiFIR. The rule changes will nearly triple the number of reportable data fields from 23 under the current MiFID to 65. The other issue is the need to provide personal identifiers for the decision maker that made the decision to deal, and if different, the individual executing the trade and/or the relevant algorithm if it was executed as such.

Aside from the data collection, firms will then need to account for data security, data privacy and data quality requirements on the information collated from across a multitude of disparate systems. In fact, in some cases, firms may find that their current reporting capabilities are not robust and flexible enough to support the increase in volume of reportable data and as such significant upgrades and changes will need to be made.

On top of changes to IT systems and processes, compliance teams will need to re-educate internal audiences, particularly in the front office, about the changes to data requirements – and many of our clients already tell us that front office staff are becoming increasingly frustrated about the new levels of data required by compliance teams and this is before MiFID II/MiFIR implementation!

For these reasons, we believe that clients who are starting to prepare for MiFID II/MiFIR now are taking the right approach even though the final RTS are not going to be published until the second half of this year. A combination of knowledge and insights from vendors, clients and peer groups, as well as in-house expertise should provide enough detail on how to start preparing for the regulation now ahead of full implementation in January 2018.

February 18, 2016

Brian Collings

Chief Executive Officer Torstone

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