Turning MiFID II pain into client gain

Turning MiFID II pain into client gain

If MiFID I was a singles tennis match MiFID II is the equivalent of a doubles game, but for many firms, still with only one player. The day-to-day workload increase under MiFID II has seen working hours move from 9 hours to 12 hours a day with the result that at first glance it may appear to generate little commercial value.

However, there are returns to be made by outplaying the competition. The bedding-in period post-3rd January is a point at which asset managers will be reviewing their relationships with dealers. Several elements – from more quantifiable best execution to a more formalised market structure – give impetus to a buy-side reassessment of their sell-side partnerships. Being a safe pair of hands during this period of disruption will allow a bank to cement existing and possibly new client relationships.

The attraction will be the quality of service provision. The challenge will be how to deliver outperformance while under duress. To achieve this sell-side firms need to move beyond staying in the game – which is hard enough – and getting into a position of competitive advantage, which is a real strain on operations.

Profiting from MiFID II

Buy-side clients know that trade and transaction reporting sits at the heart of their compliance process with MiFID II. Not only is reporting obligatory, but it also manifests the activity of gathering data that buy-side firms must be undergoing to measure best execution, investment decision making and pricing.

The capacity to support reporting is, therefore, a vital element of the client-dealer relationship. Connections that banks and brokers have established either as trading venues themselves or with third-party trading venues, directly impact their reporting obligations, the service level they can offer to customers and the costs of servicing customers. Given the importance of service and pricing in the post-MiFID II environment, making the right choice and then supporting that choice can make or break customer relationships.

However, banks and brokers themselves often struggle to field the right resources in supporting MiFID II reporting obligations because those resources are tied up in silos and/or the levels of reporting and servicing are putting a strain on legacy systems. Business is data hungry, but data is not always accessible.

The European and Securities Market Authority explicitly acknowledged the challenges firms have had in reporting when it announced the delay to dark pool caps. It stated, “trading venues only had limited time to compute and submit all data as the relevant reporting period only closed on 31 December 2017 and the data had to reach ESMA by close of business on 5 January 2018.”

Several of the approved reporting mechanisms (ARMs) and approved publication arrangements (APAs) have struggled to deliver the service they promised at the outset and led their users to assess alternative providers. However, the onboarding for a new reporting platform is neither easy or quick.

Simply better service

To offer the right level of service, brokers have to leverage their whole organisation for clients, as efficiently as possible to minimise cost. That requires several elements: flexibility, efficient aggregation, data security, and scalability. There are three levels at which the problem needs to be tackled: improved services provision, the technical complexity of providing that, and the cost model to support it.

The first point is to offer a reliable and scalable service; this has to be based upon automated processing of data, so the risks inherent in manual processing and the ‘sticking plaster’ model of tying together point solutions are mitigated. A cloud-based offering allows the service to build out with client demand.

Secondly, the technical challenge is to collect a significant amount of data from multiple sources, which is normalised to provide a single picture post-trade. It connects with multiple trading systems to deliver STP and in doing so removes the cost and complexity of managing multiple interfaces. It is also designed to be flexible so future obligations can be easily accommodated without requiring the system to be re-engineered. At this point, the speed of deployment will be of the essence.

Third, the cost of deployment has to reduce the total cost of ownership for systems to drive down operational expenditure. Mutualising the cost of ownership between a group of users allows superior service, while cloud deployment not only supports the one-to-many support model, it also reduces deployment costs.

MiFID II is an opportunity. The buy side is looking to its sell-side partners for support. Despite the sense of burden the rules impose, working with the right support can allow banks and brokers to move from the back foot to the front foot. To achieve this, dealers need to consider purpose-built systems and holistic solutions that can support future changes to rules and allow mutualisation to manage their cost base. In stepping up to the net with a new partner, they can start competing with a significant advantage.


February 27, 2018

Brian Collings

Chief Executive Officer Torstone