Ready or not, here comes MiFID II!
Originally published on Accountancy Cyprus No.128 September 2017
Article by George Giannoulakis (InvestCor Corporate Ltd, regulated ASP) and
Marina Joannou (Director at CySEC regulated firm)
“You would have had to be living in a very remote, dark cave to have missed the spectre of MiFID II (to give it its full name: the second Markets in Financial Instruments Directive (“MiFID II”)) over the past 12 months.” – N.Thompsell and T. Price, 2015. (MiFID II and its implementing Regulation on Markets in Financial Instruments and Amending Regulation (“MiFIR”) are referred to simply as “MiFID II”.) The deadline for implementation is 3 January 2018.
- What is MiFID II?
Briefly, MiFID II is the overhaul of EU legislation that regulates investment firms and intermediaries providing services related to ‘financial instruments’ (typically shares, bonds and derivatives), and the venues where the said instruments are traded.
- So what are the key parts of this overhaul?
MiFID II can be broken down into a handful of key themes:
- Transparency & Reporting
MiFID II has significantly expanded reporting and disclosure requirements. Transparency requirements (pre- and post-trade) are extended to include non-equity instruments. There is also an expansion in the scope of the reporting data required. Rules have also been established to make data available through the establishment of a consolidated tape mechanism for post-trade data (accompanied by the establishment of approved reporting mechanism (ARM)).
- Market structure / coverage
MiFID I only covered equity markets. MiFID II extends coverage for virtually all financial instruments.
MiFID II also introduces the organised trading facility (OTF) which expands the scope of a trading platform concept for non-equity instruments to encompass smaller B2B networks. This seeks to compliment existing facilities such as MTFs.
- Trading regime
Trading controls for algorithmic and High Frequency Trading (HFT) are introduced. There will be a stricter commodity regime via the inclusion of commodity instruments. Position limits are being introduced to prevent market abuse and improve transparency.
- Investor protection
MiFID II introduces a more restrictive regime for inducements with a ban on inducements for independent advisers. It introduces new obligations with regards to suitability, appropriateness, best execution; post-sale reporting; information on charges and costs.
- Internal controls / compliance and governance
MiFID II is more prescriptive in relation to corporate governance within firms to which it applies. Corporate governance amendments ensure new recording obligations for telephonic conversations and electronic communications are met. Stricter monitoring of sales and remuneration is imposed. Conflicts are to be actively prevented by firms, with the action criteria now being stated as “appropriate steps”, as opposed to “reasonable steps”.
- Which other regulations must to be considered simultaneously?
MiFID II is aligned to other European regulations such as EMIR, MAR, REMIT and SFTR. In addition, NIS and the EU GDPR is going to have a material impact across the EU, especially towards regulated entities.
- State of the industry
According to media reports, few financial institutions are ready to meet the requirements of transaction reporting under MiFID II. Even the large firms are struggling. This is conveyed in an article in the Financial Times of 3 August 2017 which provides results on a poll for MiFID II readiness:
- “According to a poll of 562 asset managers by RSRCHXchange, a research provider, in June 2017, 36 per cent of fund houses had not decided how to pay for research”
- “At least 12 of the world’s biggest fund houses, including BlackRock and JPMorgan Asset Management, are yet to make a decision on how they will pay for investment research despite a looming deadline to comply with new European rules”
A webinar in March 2017 by DataManagementReview had an early audience poll which “showed 3% of organisations completely ready to meet the requirements of MiFID II transaction reporting, 29% somewhat ready, 36% at the planning stage, 25% starting implementation and 7% having yet to start. A second poll identified key date management challenges as understanding the regulatory requirement, sourcing required data, integrating standard data codes and working across data silos.”
- So what are the biggest challenges?
Time and money. Costs are incurred by IT & data skills, strategic & key implementers, and costs increase as the deadline looms. However, it should be considered as a health check of the industry which is aimed to have long-term financial health benefits for the industry as a whole.
- What should we do?
MiFID II affects the whole industry and firms should work with peers and regulators to agree data strategy & protocols, fill gaps and get transaction reporting right as soon as possible. Working together may bring about some comprehensive, yet cost-efficient solutions that are not possible otherwise.
Contact our team of compliance and regulatory consultants for more information.