The Silver Lining for Financial Services from MiFiD II Compliance

8 Dec 2016 | , , , , ,
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By Mike Gorman

New market structural reform rules are disrupting how financial institutions are doing business — in a good way. Traditionally banks’ compliance departments have had the luxury of churning out reports to satisfy the regulators, and then filing them away. Those days are gone.

A paradigm shift in legislation, like the European Markets in Financial Instruments Directive (MiFID II) is impacting financial institutions around the world. Greater amounts of data, on more types of products, now must be analyzed and reported upon more quickly. This is forcing all operational areas, from the back-office to the front office, to upgrade their technology stack in response to the new regulatory regime. In the process, they are discovering business opportunities and new challenges.

The challenges

For products not previously governed by MiFID the implementation of the new regulations can be more complicated. These asset classes include fixed income, FX, derivatives and commodity derivatives. New tools are required to satisfy the legislation in these markets.

For example, banks looking to prove best execution requirements for frequently traded equities on the London Stock Exchange or the New York Stock Exchange have more data to build their case. But what about fixed income bonds that are traded by voice only five times a quarter? For the broker-dealer executing these trades for their clients, proving best execution is much more difficult.

Under the new transparency rules mandated by MiFID II, regulatory reporting will depend on an institution’s status. Depending on whether they are an execution venue, like a regulated market, or a multilateral trading facility, or a systematic internalizer, each will have their own reporting requirements for each class of instrument they are trading in.

For banks that are a systematic internalizer, as an example, reports are linked to the trading activity for the class of financial instruments they trade. So they will have to know if the instrument they trade is in a particular class; how much they are trading in it and the size of the market in that class.

Transparency rules also apply to liquidity in the markets. For shares characterized as having a ‘liquid market’ up to a ‘standard market,’ systematic internalizers will have to publish quotes that are visible to the whole market. Business can only be done at prices away from these quotes where the transaction being conducted is larger than that customarily undertaken by a retail investor, and where the client they are dealing with is a professional client. The regime is also being extended to ETFs and other instruments that resemble shares, bonds and derivatives.

For MiFID II transactions the data burden increases. The amount of information gathered has increased from 24 fields to 65. The financial institution will need to move from simple ‘buy/sell’ indicators toward ‘buyer’ and ‘seller’ details, including ‘decision makers.’ Different data, from different locations, will need to be reported for each transaction.

The silver lining

Many Kx customers are looking for answers on how best to build their systems. We have found this is a perfect opportunity for institutions used to analyzing large amounts of data to upgrade to flexible dashboards for visualization and reporting, creating huge opportunities for leveraging the value of their data across the enterprise.

Institutions will no longer be limited to the tactical reporting that came out of European Market Infrastructure Regulation (EMIR) and Dodd-Frank, and now have an opportunity to update their systems so that static data is no longer closed off from interacting with other systems. Financial firms can now become adaptable to future regulatory changes by building flexible and portable systems.

Especially for financial institutions with a vision for the potential of reconfiguring their infrastructure, MiFID II gives them the chance to build systems that not only meet their regulatory requirements but also break down operational data silos to get more business value, like with more effective customer retention and product development initiatives.

To do this, sophisticated data visualization, backed by a powerful database system, like kdb+, is needed. With the right tools, institutions can take a fresh approach to doing business — map out different fields in real-time; track trade data across order management systems and smoothly integrate diverse types of data from sources like Bloomberg, Thomson Reuters and other sources.

This is the silver lining of MiFID II. It is creating an opportunity for financial institutions to look at their entire infrastructure for risk management and regulatory requirements. A fundamentally new approach is developing across the industry, where financial institutions are thinking about how to meet their regulatory needs while evolving their data management systems to expand their business capabilities.

To complement Kx Systems’ product solutions, the company is supported by First Derivative’s Regulatory & Compliance consulting practice, which combines subject-matter expertise, strong product knowledge, and data & technology DNA to offer a range of consulting services that can accelerate implementation for MiFID II and MiFIR. Read more here.