With just weeks to go before the January 3 implementation deadline for the EU's Markets in Financial Instruments Directive II (MiFID II), affected financial institutions are flat out as they attempt to achieve compliance as best they can.
This is a challenge. MiFID II - considered by some to be the biggest regulatory shake-up of the European trading landscape in a generation - is broad in scope, touching on all aspects of financial services activity as it strives to improve investor protections, promote market transparency and avoid a repetition of the Credit Crisis of a decade ago.
The regulation is now widely understood, although the European Securities Market Association (ESMA) even at this late stage continues to tinker with its guidance on minutiae. To date, firms' preparations have involved creative innovations, as they grapple with the multi-faceted regulation. Anecdotally, firms report that they expect to be ready in time for the deadline, albeit with significant workarounds that they are likely to revisit later to improve and streamline operations.
Firms are finding, however, that the regulators' intentions - in terms of more prescriptive measures around best execution, trading venues, trade / transaction reporting and other aspects of the trading work flow - are having consequences for market structure, potentially changing the way firms approach their trading business. And while Brexit is adding to general uncertainty about EU regulations, UK practitioners understand the need to achieve MiFID II compliance since the deadline falls well before any exit of the EU can take effect.
A number of key aspects require firms' attention. These include:
- Transparency, in terms of pre- and post-trade reporting;
- Best execution and its implications for order and execution management systems, smart order routers (SORs) and record-keeping;
- Algorithmic trading and monitoring;
- Instrument and client definition management;
- Time synchronisation and high frequency trading classification;
- Systematic internalisation;
- Risk compliance and checks.
These and other requirements introduced by MiFID II are impacting how firms operate after the January 3 deadline. Specific provisions - like the new volume caps and high-frequency trading (HFT) classification - as well as broader concepts like new venue types across all asset classes - will affect how firms approach macro issues like staffing and more micro issues like the operational requirements of the OMS and EMS platforms.
For now, firms should focus their attention on the January 3, 2018, implementation date. A few pointers:
• There is no more time for strategic discussion -
immediate action is the only option.
• Consolidate where possible - it will be difficult to maintain a complex mix of vendor solutions and in-house developed applications.
• Review the business model - identify strengths and weaknesses and look for potential outsourcing or use of external brokers for certain markets and/or asset classes.
• Ensure reference data quality - it will affect trading business significantly under the new regime.
Oh, and don't expect to take too much time off for the holiday season.