Trading Firms Cannot Afford Mifid Ii Compliance Complacency

By Eric Berdeaux, OXIAL and Frederic Ponzo, GreySpark Partners

Eric Berdeaux

The second iteration of the EU’s Markets in Financial Instruments Directive (MiFID II) is one of the most talked about pieces of legislation in the capital markets industry, intended by the EU to bring new levels of transparency to buyside and sellside trading activities across all the major asset classes.

However, some buyside market participants have been slow to respond to the need to begin implementing the directive’s requirements into their markets-facing and operational activities, claiming that their EU member state-level regulators have not provided them with enough information around the practicalities of how to do so.

Specifically, 54% of EU-based asset management firms do not believe that they were given enough information by their national competent authority (NCA) on how to respond appropriately to MiFID II’s requirements, according the findings of a survey covering 562 European asset managers conducted by market research aggregator RSRCHXchange.

According to the survey, only 7.1% of the 562 asset managers claimed that they will be MiFID II-compliant in time for the Jan. 3, 2018 deadline, while 44.2% of the survey respondents said that they are still planning to wait until after the compliance deadline passes to begin implementing the regulation’s mandates.

It’s of the highest importance for asset managers – as well as all EU capital markets entities covered by MiFID II – to achieve a level of clarity urgently as to the precise nature of their MiFID II compliance requirements and to then put in motion an operational plan to act on those needs.

Ignorance is not an excuse

Many bank and non-bank trading firms cite a lack of information about MiFID II’s requirements as an excuse for not addressing them, while others admit to simply not being prepared for the January 2018 compliance deadline.

However, the reality of a firm’s lack of MiFID II preparedness is typically more complex than simple excuses relating to a lack of awareness of the directive’s specific mandates and the effect that they are likely to have on the business and trading model. For any firm, achieving MiFID II compliance is a complex affair that requires mastery over the company’s internal and external trading data and client data, all of which demands that effort be refocused away from making money for clients.

MiFID II cannot be approached as a one-off project

In many cases, trading firms are approaching MiFID II implementation as a one-off project. However, when viewed in totality alongside complementary EU directives and regulations such as the General Data Protection Act, the Market Abuse Directive and Regulation, and updates to the UCITS and PRIIPs requirements, achieving compliance with the Markets in Financial Instruments Regulation (MiFIR) – which is the rule set that NCAs must use to implement MiFID II at the EU member state level – means that many trading firms are facing a lengthy, on-going process of being compliance ready for decades to come. Instead, MiFID II signals the start of a new era of regulation in which compliance is a perpetual operational activity that must be continually managed and run effectively.

To do so, trading firms needto be systematic andup-to-date with the specific actions that they must take on a case-by-case basis. This work can be done using a spreadsheet, database or SharePoint, but it requires human input, and humans are fallible. But, if firms use automated tools that take away the hassle of managing compliance, then the risk associated with falling out of compliance is managed significantly more efficiently.

Getting started – if you haven’t already

The first step in achieving MiFID II compliance is to assess which areas of the trading firm’s business face the most complex implementation tasks and to then prioritise those tasks appropriately.

First, the business should look at its overall governance systems; specifically, it must work to answer questions such as‘What is the current structure and process around governance? Who is responsible for what?Who is in charge?’ and, crucially,‘Who is liable for non-compliance?’At a more granular, operational level, firms trading algorithmically must understand how MiFID II changes the rules around how different algos are governed.

Second, it is vital for the business to know its entire estate; specifically,‘What do you have?’ and ‘Where are the holes?’To answer these questions, a complete inventory of all automated trading tools, algorithms and models will stand any firm in great stead when readying itself for MiFID II. This exercise must be thorough – it is worse to perfectly document 90% of your estate than to partially document 100% of it.

You also need to dedicate resources to do the work, to take the first pass at logging all the required information.Relying on traders to give up time from their day jobs is a recipe for disaster, and so this element needs a bespoke resource to manage it effectively.

For any trading firm failing to comply with MiFID II, there will most likely be some initial leniency from local and EU-level regulators as long as organisations can demonstrate that they are making progress. But, beyond a short-term grace period,regulators are bound to levy heavy fines or even the retraction of a passporting license.

This means that any organisation affected by MiFID II must lose the complacency, not hide behind a perceived lack of information about requirements, pull their finger out and get started ASAP.

Eric Berdeaux is CEO of new generation GRC firm, OXIAL and Frederic Ponzo is managing partner, London, at financial markets consultancy, GreySpark Partners.

By Eric Berdeaux, OXIAL and Frederic Ponzo, GreySpark Partners

Eric Berdeaux

The second iteration of the EU’s Markets in Financial Instruments Directive (MiFID II) is one of the most talked about pieces of legislation in the capital markets industry, intended by the EU to bring new levels of transparency to buyside and sellside trading activities across all the major asset classes.

However, some buyside market participants have been slow to respond to the need to begin implementing the directive’s requirements into their markets-facing and operational activities, claiming that their EU member state-level regulators have not provided them with enough information around the practicalities of how to do so.

Specifically, 54% of EU-based asset management firms do not believe that they were given enough information by their national competent authority (NCA) on how to respond appropriately to MiFID II’s requirements, according the findings of a survey covering 562 European asset managers conducted by market research aggregator RSRCHXchange.

According to the survey, only 7.1% of the 562 asset managers claimed that they will be MiFID II-compliant in time for the Jan. 3, 2018 deadline, while 44.2% of the survey respondents said that they are still planning to wait until after the compliance deadline passes to begin implementing the regulation’s mandates.

It’s of the highest importance for asset managers – as well as all EU capital markets entities covered by MiFID II – to achieve a level of clarity urgently as to the precise nature of their MiFID II compliance requirements and to then put in motion an operational plan to act on those needs.

Ignorance is not an excuse

Many bank and non-bank trading firms cite a lack of information about MiFID II’s requirements as an excuse for not addressing them, while others admit to simply not being prepared for the January 2018 compliance deadline.

However, the reality of a firm’s lack of MiFID II preparedness is typically more complex than simple excuses relating to a lack of awareness of the directive’s specific mandates and the effect that they are likely to have on the business and trading model. For any firm, achieving MiFID II compliance is a complex affair that requires mastery over the company’s internal and external trading data and client data, all of which demands that effort be refocused away from making money for clients.

MiFID II cannot be approached as a one-off project

In many cases, trading firms are approaching MiFID II implementation as a one-off project. However, when viewed in totality alongside complementary EU directives and regulations such as the General Data Protection Act, the Market Abuse Directive and Regulation, and updates to the UCITS and PRIIPs requirements, achieving compliance with the Markets in Financial Instruments Regulation (MiFIR) – which is the rule set that NCAs must use to implement MiFID II at the EU member state level – means that many trading firms are facing a lengthy, on-going process of being compliance ready for decades to come. Instead, MiFID II signals the start of a new era of regulation in which compliance is a perpetual operational activity that must be continually managed and run effectively.

To do so, trading firms needto be systematic andup-to-date with the specific actions that they must take on a case-by-case basis. This work can be done using a spreadsheet, database or SharePoint, but it requires human input, and humans are fallible. But, if firms use automated tools that take away the hassle of managing compliance, then the risk associated with falling out of compliance is managed significantly more efficiently.

Getting started – if you haven’t already

The first step in achieving MiFID II compliance is to assess which areas of the trading firm’s business face the most complex implementation tasks and to then prioritise those tasks appropriately.

First, the business should look at its overall governance systems; specifically, it must work to answer questions such as‘What is the current structure and process around governance? Who is responsible for what?Who is in charge?’ and, crucially,‘Who is liable for non-compliance?’At a more granular, operational level, firms trading algorithmically must understand how MiFID II changes the rules around how different algos are governed.

Second, it is vital for the business to know its entire estate; specifically,‘What do you have?’ and ‘Where are the holes?’To answer these questions, a complete inventory of all automated trading tools, algorithms and models will stand any firm in great stead when readying itself for MiFID II. This exercise must be thorough – it is worse to perfectly document 90% of your estate than to partially document 100% of it.

You also need to dedicate resources to do the work, to take the first pass at logging all the required information.Relying on traders to give up time from their day jobs is a recipe for disaster, and so this element needs a bespoke resource to manage it effectively.

For any trading firm failing to comply with MiFID II, there will most likely be some initial leniency from local and EU-level regulators as long as organisations can demonstrate that they are making progress. But, beyond a short-term grace period,regulators are bound to levy heavy fines or even the retraction of a passporting license.

This means that any organisation affected by MiFID II must lose the complacency, not hide behind a perceived lack of information about requirements, pull their finger out and get started ASAP.

Eric Berdeaux is CEO of new generation GRC firm, OXIAL and Frederic Ponzo is managing partner, London, at financial markets consultancy, GreySpark Partners.