PREPARING FOR MIFID II COMPLIANCE WHY YOU NEED A STRATEGIC SOLUTION TO REGULATORY CHANGES

Simon Richards, CEO USA, Fonetic

The trading community of banks, brokers, financial institutions and independent advisors are getting to grips with a new set of rules imposed by the regulators and backed up by the real possibility of billion dollar fines. Traditionally conservative and slow to change, this sector is demonstrating willing when it comes to complying with the regulatory obligation brought in with the Markets in Financial Instruments Directive (MiFID) in 2007.

However the changes haven’t stopped there; since the financial crisis, MiFID has been revised to improve the functioning of financial markets and strengthen protection for investors. Known as MiFID II, the new requirements will come into effect in January 2017.

What is changing?

One of the most significant changes outlined in MiFID II is the extension to the scope of the Transaction Reporting Obligation, which states that a complete record of all transactions, activities and services must be retained and records stored for a minimum of 5 years and be available where requested by an authority up to 7 years (under Dodd-Frank, phone recordings are required to be kept for 12 months).

When it comes to a traders’ phone calls and e-communications, the new regulations are particularly exact covering, as expected, fixed line and mobile calls and now also including instant messaging (IM), text messages and internet calls using services such as Skype. In its notes on application, the ESMA – the MiFID II regulator – highlights that:

“Investment firms need to record relevant telephone conversations, face-to-face meetings and electronic communications relating to own account and clients transactions. Clients must be notified that telephone conversations will be recorded. The records must be sufficient to establish the terms of any order placed by a client as well as to detect potential market abuse. Such records will need to be provided to the client on request.”

With regards to storage, MiFID II requires that all trades, including algorithmic trading records, must be stored in an approved form – on a medium that can’t be changed or deleted – with accurate, time sequenced record of orders, placed executed or cancelled.  The records must be available to clients on demand.

Context is key

Simon Richards
Simon Richards

The amount of data involved in the new phone and ecomms regulations is daunting – imagine having to trawl through the detail of every transaction when an alert is triggered. Firms will need to resource appropriately, partnering with the right technology solution provider, so that they are able to stay on top of business.

When it comes to speech analysis solutions, it is not necessarily about which one uses the better technology, than about which technology is fit for purpose in your environment. For example, there is a 50% data loss in transcription methods, which makes accuracy impossible. But there is far more to a successful speech analytics solution than simply trying to get as close to 100% accuracy for word recognition alone. Other considerations must include minimizing loss of data at the processing stage; speed of processing and of searching and the ability to work across multi-channels of data sources and all voice recorders and trading solutions.  Most crucial of all is an ability to analyse the context of the voice content so that true meanings are established right at the beginning of the process and this capability relies on experience and understanding of the trading floor environment as well as trading specific language and slang. For example, the word ‘quarter’ is often used in the context of trades but it is also a word often used in sport – any analytics of worth must be able to spot the different uses. What is needed is a solution that goes beyond who’s talking to whom and how often. A relational picture must be built up over time that allows the analysis of all the types of communications put together as well as the people involved. Only then will context anomalies show up.

The way of the future

The MiFID regulations should not be treated as a one off set of changes and then back to the old regime of letting things look after themselves. The MiFID II revisions makes it clear that the regulations are going to be regularly reviewed and are likely to change often and rapidly. Banks, brokers, financial institutions and independent advisors are already showing willing when it comes to responding to the Dodd-Frank regulations but they need to develop the ability to adapt on an ongoing basis as new amendments are announced and then come into play.

In order to keep pace with the rate of change, the industry needs to become more strategic and move away from short term tactics. The best solution will be one that has a richness of functionality and analytics, including context of content capability, to provide the industry with the ability to plan for regulatory change at the point of announcement allowing as much time as possible to prepare. Companies need to be able to manoeuvre and adapt to changes in order to stay live in the market and a wise firm will begin planning and budgeting for a strategic solution that enables them to keep pace with changing regulations. Look for one that reduces the stress of managing risk and has development capability so will stand the test-of-time and you won’t go wrong.