As the January 2018 Markets in Financial Instruments Directive (MiFID II) implementation deadline approaches, asset managers and institutional investors in the EU and globally are focused on the costs and potential operational disruptions to existing business models associated with compliance. At issue for the buyside under MiFID II are increased trade and transaction reporting requirements for their equities, fixed income, FX and associated derivatives businesses as well as generally increased levels of operational compliance that require large volumes of data generation and recording.
As detailed in our recent report, Mastering MiFID II: Turning Buyside Compliance Costs into Strategic Investments, GreySpark Partners believes that in response to these regulatory pressures the buyside industry must develop a framework for managing the ‘data deluge’ associated with MiFID II. Specifically, asset managers and institutional investors can lower future marginal compliance costs and improve existing operations by approaching MiFID II compliance not as an incidence of one, new stringent piece of regulation, but rather as a template for a potentially endless stream of ongoing regulatory change management programs to come in the future. Viewing MiFID II in this way means that buyside firms have an opportunity in 2016 to set out long-term strategies, processes and – where necessary – new IT infrastructure designed to handle all future regulations-related business environment change.
These conclusions are based on the premise that buyside firms stand to benefit from operational and technology investments geared toward achieving MiFID II compliance, but only if these investments form part of a longer-term strategy to prepare IT operations for future regulatory and business challenges.
New regulatory ethos and landscape
The report argues that, in the short-term, efforts by buyside firms to comply with MiFID II must be focused on safeguarding and future-proofing long-standing business and operational models. Doing so requires that decision-makers, change-managers and systems administrators within the firms are fully cognizant of the new regulatory ethos and environment in which they operate, not only asthose ethos and environments pertain to MiFID II, but to any and all proposed or forthcoming regional or global regulatory regimes.
The post-financial crisis era has so far been characterized by significant changes to the tenor of markets regulation; not only are regulators demanding increased levels of transparency on shortened timelines, but increased levels of scrutiny are accompanied by a similar increase in the frequency of regulatory change. As a result, the buyside industry’s approach to regulatory compliance has changed significantly. Many large firms now realize that they must take ownership of regulatory implementation and compliance processes and drive them forward so as to minimize operational and business strategy externalities.
For example, GreySpark has advised EU-based buyside firms that their MiFID II compliance efforts must make use of new approaches to data management that emphasize the ability to gather, process, disseminate and store data as a baseline function of the business overall as a means of deriving actionable insight from it. These insights can then be utilized by the companies and their clients to improve and expand existing operational processes and identify new opportunities to grow client market share. Those firms that meet the challenge of managing their operational and end-investor client data in these ways as a means of achieving MiFID II compliance will rapidly transform their business models into ones more akin to that of a data management company; they will become capable of leveraging data expertise to improve the business functions of the investment business and to identify new investment opportunities for its clients.
These data management capabilities will allow buyside firms to leverage data gathered for one regulatory compliance or business purpose in service of further purposes. For example, MiFID II, the EU’s Market Abuse Regulation (MAR) and the European Markets Infrastructure Regulation (EMIR) share many of the same data points in terms of their market surveillance and trade and transaction reporting requirements, and we at GreySpark predict that future iterations of these regulations will increase these compliance mandates and data overlaps. As such, it is becoming increasingly advisable for many buyside firms to design a regulatory reporting hub comprised of so-called golden source data that can be used to meet compliance data needs of not just MiFID II but a wide range of regulations.
Compliance data can improve business performance
This high-quality data can furthermore be leveraged to pursue business objectives only tangentially related to or completely independent of compliance mandates. Relevant areas within buyside firms wherein these strategic investments can be applied include:
- surveillance and monitoring;
- complex and repetitive task automation;
- productivity enhancement;
- predictive analytics;
- liquidity sourcing;
- trading strategies;
- human capital costs; and
- the provision of detailed levels of insight drawn from large data sets.
I have observed that many asset managers and institutional investors still lack the technological sophistication necessary to harness the data management outlay associated with MiFID II compliance. Initial industry concerns over MiFID II’s implementation suggested that meeting theregulatory requirements would displace efforts to renew IT systems and lead to further tech debt; this concern was reiterated upon MiFID II’s implementation delay from January 2017 to January 2018. Our observations in the market, however, suggest that the delay has had the opposite effect, reducing tech debt as firms think holistically when making technology upgrade decisions designed to assist with the compliance overheads.
Those buyside firms already undertaking a strategic review of IT capacity and future demands related to regulatory mandates are on the path to creating a competitive advantage for themselves.Willis Bruckermann, Analyst Consultant, GreySpark Partners
Those buyside firms already undertaking a strategic review of IT capacity and future demands related to regulatory mandates are on the path to creating a competitive advantage for themselves. Time still remains for those asset managers and institutional investors that have not begun to view their existing regulatory change management processes as a long-term change-the-business endeavor rather than as a short-term compliance effort. However, if those small-to-medium-sized buyside firms do not adapt to the changes in the operational and technological landscape around them, then I believe they risk placing themselves into a potentially vicious cycle of deploying one-off compliance costs on a never-ending basis.
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