Tackling MiFID II head on

Read the interview and learn about:

• MiFID II Transaction Reporting Requirements
• Meeting the compliance challenges of MiFID II
• Power of the cloud and partnerships

 

Nick Sylvester, Global Partner Director, Financial Risk Division, Thomson Reuters

According to a recent Financial Times article, “MiFID II, the vast set of rules governing Europe’s financial system, is an ugly word in the U.S. investment community” because it potentially drastically alters the way traders, brokers, analysts, and fund managers interact. Bankers in Europe and other regions affected by the regulations agree and worry about unintended consequences beyond compliance burdens. In short, it is widely agreed that MiFID II represents one of the most fundamental and far-reaching regulations the industry is facing. This article addresses the options for tackling the challenges head on.

Demand for better oversight of the financial markets means the scope of transaction reporting has increased, both for the instruments that are covered and the amount of information required in each report. It will now extend to any financial instrument that has traded or been admitted to trading on a trading platform (and not just the regulated markets as dictated by MiFID I), as well as those that have had a request for admission to trade, and those for which an underlying instrument or basket/index of instruments has been traded. Institutions that deal with fixed income, foreign exchange, and currency and commodity derivatives must now meet the same standards as buy-side equities traders.

As a result, banks are looking for technology solutions that will allow them to capture and analyze transaction-related data throughout the entire lifecycle of a trade. These solutions will provide workflows for institutions to have access to an extended set of data to determine what reporting requirements are needed across asset classes for MiFID II compliance.

Meeting new compliance tasks head on

Among the challenges that will affect financial institutions’ compliance with MiFID II are:

• managing requests for quotes and responses,
• balancing the size and timeliness of execution,
• choosing participants in the process, and
• successfully gauging the risk of a trade’s market impact.

Sales desks and traders must have access to the broadest and most up-to-date real-time market data, available on desktops and within their firm’s streamed-pricing tools.

Broker-dealers who only infrequently execute bond trades and managers seeking to ascertain whether dealers are quoting the best price must now add MiFID compliance to their workflow. Solving for this requires new technologies and the ability to scale them according to a firm’s individual needs, and it has created a large, untapped opportunity in over-the-counter markets.

How will trading be affected? When trading through a recognized venue, a managed services platform should handle the necessary publication of quotes and trades. However, when dealing directly with clients or other firms, this responsibility falls to the liquidity provider, though either counterparty can publish details of the trade itself. Visibility of other dealers’ quotes and trades, whether from trading venues or OTC data provided via the Approved Publication Arrangements (APAs), will help with price discovery.

Traders and sales desks will need to build strategies for using this data to price products, based on visible market activity and how the competition will react to their firms’ own visible quotes. Quotes can remain private in certain instances, depending on the size, adding a new strategic dimension to the buy- and sell-sides, which can decide when to select quote sizes above and below transparency thresholds.

Successfully managing MiFID II compliance will require effort on the part of every division in a financial services institution, though finance and risk teams face the largest immediate challenge. They must grapple with the business impact of the rules, but also with the need to develop and implement new technologies—and hire or train the staff to manage them. Financial services institutions hoping their legacy systems will be up for the task may eventually realize that relying on them is more costly than building new systems from scratch. That said, building a proprietary system may not be necessary.

Successfully managing MiFID II compliance will require effort on the part of every division in a financial services institution, though finance and risk teams face the largest immediate challenge.Nick Sylvester, Global Partner Director, Financial & Risk Division, Thomson Reuters

The power of the cloud and successful managed services platforms

Many vendors have begun to offer managed services to help financial institutions quickly scale their efforts to deal with MiFID II, and reduce the costs related to compliance. Some are embracing an application service model (ASP) approach in which the software vendor takes over the hosting and technical management of a client’s software installation, removing that responsibility from the client. Other firms choose to host their software solutions using vendor partners and data centers located off site.

There is increasing demand for cloud solutions that can provide the asset management community with flexibility to scale according to specific needs. The goal is to enable firms of all sizes to stay up-to-date on technology and make sure they have adequate resources (management of servers, computing, networks, etc.) available at all times and at the lowest possible cost. In this model, the burden of ownership is shifted to the vendor without affecting the client’s ability to use the technology. The vendor also faces the responsibility of launching products in a timely manner to meet changing requirements—a crucial task when it comes to regulations. Small changes in regulations can require adjustment across the enterprise in areas such as client portals, pricing and trading controls, data management, and event reporting.

Successful managed services platforms are those that can be scaled easily within a firm of any size and operate for the most part without requiring ongoing input from data, services, or applications teams, which can substantially raise costs. Part of the appeal of managed services is their ability to cut infotech costs and allow a firm to deploy resources into important strategic and revenue-generating efforts. Automation allows managed services platforms to accomplish a wide range of tasks with as few resources as possible. Many of the advances being made in today’s technology world, such as artificial intelligence and machine learning, may come to play a bigger role as the managed services trend grows.

Strong partnerships will be part of the solution to MiFID II

Data providers like Thomson Reuters are partnering with system solution vendors to provide compliance solutions, and believe that under MiFID II, the landscape will change significantly with the introduction of new trading venues, including multilateral trading facilities, organized trading facilities, and the SI regime. These will be more powerful because they will be built on a foundation of greater transparency, a requirement for compliance that is also becoming a new tool in the arsenal of financial services firms—which are increasingly using managed services to leverage it in new and exciting ways. We believe that investment management clients of system vendors entering these partnerships will be able to leverage a competitive advantage from their managed services offering when meeting compliance requirements associated with MiFID II.