Authorised and regulated by the UK’s FCA to provide investment accounts, we are bound by CASS rules to segregate and protect client assets.
The International Capital Market Association (ICMA) says the objectives of MiFID II are “to increase market transparency, efficiency and safety by bringing the majority of non-equity products into a robust regulatory regime and moving a significant part of OTC trading onto regulated platforms.” It intends to do this by adding significantly more layers of transaction reporting complexity and greater regulation of traditionally opaque trading facilities, such as those which operate dark pools.
These new reporting obligations will be onerous, demanding more reporting on more transactions in more instruments by more market participants. The number of data fields required is more than doubling from 23 to (at least) 65. In addition, many of the existing fields required by MiFID I will be amended to encompass more complexity and a greater breadth of instruments.
This will likely require the administration of considerable data, and without sophisticated technological systems such as Dolfin’s, firms will struggle to meet their regulatory obligation and experience severe disruption to their operations.
“MiFID II will ensure that money is managed in a much more robust environment”
To date, equity trading has been covered by the earlier MiFID regulation. Extending this across multiple asset classes, including bonds and many derivative products, expands coverage to ensure far greater regulatory oversight. Dolfin’s Chief Operating Officer, Amir Nabi, explains that, through MiFID II, investors are getting a regulatory regime “that will ensure that their money is managed in a much more robust environment.
“The requirements aim to protect them against market abuse and ensure that they receive best execution and much greater transparency in reporting than ever before,” he says.
The technical challenge
The main challenge for organisations will be in setting up their technology to cope with the new regulatory rigour. “MiFID II’s regulatory regime brings into effect pre-trade transparency for bonds as well as post-trade,” the ICMA stipulates.
“This will result in a significant impact on the market structure of bond markets. Bond pre-and post-trade transparency requirements will be calibrated for different types of bond market trading structures such as order-book, quote-driven, hybrid and periodic auction trading systems. In order to calibrate bonds correctly for MiFID II transparency obligations, IT systems have to be enhanced, developed or built from scratch. This is a major undertaking for the industry. Banks, regulators and investors are dependent on data collected to meet MiFID II’s commitments.”
This adds up to a major IT upheaval. Furthermore, delays by the European Market Standards Authority in producing precise regulatory technical standards has led to a knock on effect throughout Europe, with Member state regulators slow in producing the rules and guidance for regulated firms. Listening to the market, the EU has decided that MiFID II will not now be implemented until January 2018. Although in principle this allows firms a year and a half to carry out the necessary adjustments to their systems, in practice, what many are embarking upon is a major and expensive root-and-branch upgrade to their existing systems and controls.
In essence, the question CTOs are grappling with is whether to build new systems, or to buy in proprietary software.
“We are able to quickly adapt to new regulatory requirements.”
Amir Nabi · Chief Operating Officer
“Do asset managers have to rebuild their systems to be able to cater for MiFID II?” asks Nabi. “Should they approach specialist vendors who will take care of that on their behalf? These are major and expensive issues that all firms are facing at the moment.” He adds that Dolfin’s decision has been to develop its own system and to ensure that the new platform will be MiFID II compliant in good time. “Unlike some older and larger firms that are encumbered by their legacy systems, we are a young, agile firm that is able to quickly adapt to new regulatory requirements. We think this will be very reassuring for our clients,” he says.
The constantly shifting regulatory landscape requires more agile and more robust data control processes than ever before. Simply patching up existing systems, or scaling up manual work will not be sustainable. The new regulatory standards run for many thousands of pages, laying down a significant challenge to the market as a whole. The FCA have begun to release consultation papers for how firms should implement requirements in the UK regulatory environments, though at present finalised rules are not expected until summer 2017. Firms play the waiting game, and try to anticipate FCA interpretation of MiFID as best they can.
Businesses that fail to comply are likely to receive significant sanctions and fines as part of the regulatory regime – but the result will benefit investors considerably.
“The important message for investors,” explains Dolfin’s head of compliance Asif Lalani, “is that clients will have much better protection. MiFID II will ensure that organisations will have much better structures in place. The governance of asset managers will be much stronger.
“Best execution will be rigorously adhered to and much more transparent thanks to better, quicker reporting,” says Lalani. “Overall, MiFID will ensure that clients and investors can better manage their risk. They need to be aware of this and take MiFID II compliance into account when considering who they choose to do business with.”
In conclusion, MiFID II is one of the latest pieces of post-crisis, pan-European financial services regulation designed to ensure better services and protection for investors. While the burden on providers will be expensive and time consuming to implement, those firms that are quick to go with the flow and embrace the new regime will win out, attracting more business over those that are slow and less agile in their response.