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The announcement in February 2016 that MiFID II execution would be delayed by one year was welcomed by market participants, as firms struggle to overcome the challenges of the exceptional technical implementation required to comply. Once the date has been officially approved by all parties, investment firms trading instruments under the scope of MiFID II have until 3 January 2018 to make the necessary changes and for most, there is still much to be done.
MiFID II (together with the Markets in Financial Instruments Regulation – MiFIR) will trigger a complete overhaul of the existing financial markets infrastructure. In a multi-layer approach, the new regulation will widen the scope of existing directives and regulations and provide greater power to regulatory bodies to enforce the new changes.
The scope of MiFIR/MiFID II is vast, covering a wider range of financial instruments and activities than MiFID I. These include specific items on enhanced investor protection, the creation and operations of ‘Organized Trading Venues’ (OTFs), best execution requirements, the banning of inducements, compliance rules, stricter governance requirements, extended market transparency and transaction reporting. The list is seemingly endless. While the delays have allowed for a more realistic implementation timetable, most firms still have a long way to go before they will be MiFID compliant.
Some of the modifications and new requirements will impact buy-side firms as well. During our recent buy-side working group on MiFIR/MiFID II in London, survey results revealed that the area of regulation causing our customers most concern was reporting, with 36% of the audience citing this as their primary worry. This is hardly surprising when looking at the impact the new regulation will have in this area of trading for the buy-side.
Under MiFIR/MiFID II, specific requirements apply to so called ‘Investment Firms’ (IFs). Consequently, market participants now need to check if this status applies to them and take action accordingly. When asked about their status, the vast majority of respondents at our buy-side working group (73%) confirmed that – according to the MiFIR/MiFID II definition – they will be considered an IF, and therefore now have to prepare in order to fulfil the respective reporting requirements.
Another issue that frequently came up in subsequent discussions was that until now, the sell-side had practically taken over reporting responsibility for their buy-side counterparts. Expectations that this will change in the future as well as the high sensitivity of buy-side firms concerning data protection, i.e. sharing personal client or staff information with the sell-side, will ultimately lead to a stronger urge for buy-side firms to be able to report themselves.
Under the new MiFIR/MiFID II regime, transaction reporting may be conducted via the trading venue, an Approved Reporting Mechanism (ARM), or the investment firms themselves. So having an element of buy-side involvement in the process is a new mandatory part of trading instruments included under MiFIR/MiFID II in some jurisdictions. And all transaction reports will have to be reported no later than T+1, meaning it’s becoming a far more complicated world for the buy-side in the future.
In addition to the requirement to report derivative transactions through the European Market Infrastructure Regulation (EMIR) since August 2015, buy-side firms will also need to comply with further provisions in MiFIR/MiFID II that could prove challenging. Requirements that are new for the buy-side include the reporting of fields with personal information such as the decision maker, as well as additional fields previously not foreseen such as short-sale indicator.
As a market infrastructure provider, we work closely with our buy- and sell-side clients to both facilitate dialogue and collaborate with regulators in order to tackle reporting regulation from all angles. This is because one of the main issues that we see in the market is the lack of a holistic, long-term solution that firms take when addressing regulation – it will often be managed in a piecemeal fashion, with each new rule dealt with as an individual obstacle instead of the more strategic approach of looking at the regulatory landscape as a whole.
The regulatory mix is ever-changing, and MiFIR/MiFID II is simply the latest set of requirements that market participants need to address. Regulatory reporting services that aim to overcome various strands of the regulation (including the mandated levels of transaction and trade reporting) across multiple directives and jurisdictions, as Deutsche Börse’s Regulatory Reporting Hub does, will be the most efficient in the long run.
Looking ahead, MiFIR/MiFID II has the potential to boost transparency and increase investor protection. But in the short term, readying for implementation is likely to continue to be a painful process and no allowance for a transitional stage will make the deadline even harder to meet.
The extensive and comprehensive details of MiFIR/MiFID II are undoubtedly taking their toll on the buy-side, in particular when looking at the new scope for transaction reporting. Adopting an implementation plan that approaches regulation strategically, rather than in a siloed fashion, and is smart and forward-looking will be the key to success for most firms. This will not only be crucial in order to become compliant under MiFIR/MiFID II, but also for the future waves of regulation that are inevitably heading their way.
Georg Groß is responsible for Regulatory Services, a focal point of growth for Deutsche Börse Group. Regulatory Services offers reporting solutions to help clients meet current and future regulatory obligations. As a separate department it has been integrating all related services to financial markets regulation within Deutsche Börse Market Data + Services since March 2016.