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Far-Reaching Consequences: The Implications of MiFID II

Harpreet Singh, Director, Brickendon

The Markets in Financial Instruments Directive, aka MiFID II, remains one of the most talked about regulations in the financial services sector. Its impacts are far reaching – both in terms of the macro structure of the overall financial markets and the internal functional areas within the financial institutions themselves.

The deadline for MiFID II compliance has already been delayed a year to January 2018 in response to concerns about the complexity of implementation. With the new deadline now upon us many banks and asset managers are still worried. Their concerns can be primarily divided into two parts:

Data requirements

The foundation of MiFID II is data, however it requires firms to understand their data, conduct analysis of it, report it, or make decisions based upon it. The requirements for data are not limited to a specific part of the rules but are spread out across various articles and sub-articles within the regulation. As with many other data regulations, the data requirements can be categorised under completeness, timeliness and accuracy:

  • Completeness. MiFID II asks for more data objects and more data points than its predecessors. For trade and transaction reporting examples include quotes, orders and transactions, and data points are the number of fields within them. For example, MiFID II requires 50 more fields to be filled out for transaction reporting than were required for MiFID I. Additionally, MiFID II requires firms to understand their execution-related data, trade data and product and client reference data – while potentially either publicising it to clients or sending it to regulators.
  • Accuracy. One of the main aims of MiFID II is to bring standardisation to the marketplace. Standardisation makes it easier to compare firms, identify the laggards and measure accuracy. The reference data requirements are already proving onerous and have far-reaching data privacy issues for non-EU participants.
  • Timeliness. Requirements including ‘as soon as technologically possible’ and ‘near real-time’ have become the norm for regulatory compliance since the credit crunch. MiFID II requires near real-time reporting for all trades conducted at a trading venue. Moreover, all transactions must be reported to their National Competent Authority (NCA) no later than one day post-transaction.
  • Unclear rules. Almost every area of MiFID II regulation has various levels of uncertainty – although the areas of best execution, systematic internaliser regime, extra territoriality and data protection are particularly unclear. Parts of these issues relate to the amount of data that MiFID II requires while the remainder stems from the nature of the directive itself. The products involved are significantly more complex and the market structure is bilateral in nature. As a result, the data to conduct the required analysis is not readily available.

MiFID II impact

Unintended consequences

Without doubt there will be implementation challenges that will be difficult to overcome. The regulators expect better data quality and now regularly penalise firms that don’t comply. Given that MiFID II is considerably more complex and impacts many more products and firms, it’s likely that more fines will be issued once it comes into force.

The question is whether there is a value in giving more time to industry so that they can better adjust to life post-MiFID II? Will the implementation create a division between big and small firms or would it actually standardise the market and create more transparency for investors? The expectation of the regulators is that it will do the latter – but the only sure thing is that it will change the financial markets as we know them today.

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