By Brian Lynch, CEO of Risk Focus
MiFID II’s pre- and post-trade reporting rules are detailed and specific by asset class or sub-class, and firms will require an integrated, data-driven decision process at the front end to have any chance of achieving compliance. But many firms don’t have the technology or processes required to meet the regulations, and they will be looking for support from vendors in the form of new data services, outsourced expertise and software tools.
The European Securities and Markets Authority (ESMA) recently published the long-awaited regulatory technical standards (RTS) under the Markets in Financial Instruments Directive II (MiFID II). This will have a number of significant effects for those with any operations in any of the 28 European Union (EU) member states, each of which met with ESMA to discuss the rules. There are some positive impacts affirmed by the RTS. Reduced thresholds for block trade reporting waivers is a positive impact on trading and liquidity, as more trades will now be exempt. Similarly, extending the Order Management Facility waiver across non-equities is helpful, notwithstanding concerns about the minimum sizes being too low in certain asset classes. However, as expected, some existing waivers no longer apply, and as a result, a number of new parties have been pulled into MiFID reporting. For example, asset managers that benefited from the FCA’s portfolio manager exemption.
The release of the RTS has essentially become the official starter’s pistol for the race to implement MiFID II. Every firm impacted, if it hasn’t done so already, must launch an intensive project that will build on existing infrastructure for MiFID and/or EMIR, or it will be starting from scratch. Business analysts, developers, testing teams, and end users will be looking for support from vendors in the form of new data services, outsourced expertise and software tools that support the analysis, testing and implementation of their final solutions.
Our focus with regards to MiFID II lies in the increased data requirements (65 fields as it stands today) and the validation rules for which we can help clients get their MiFID II reporting right well before the deadline. However, data validation is only part of the supervisory system that clients need to put in place; data validation happens after the messages are created and assumes that clients know what and why they are reporting in the first place. The immediate question in our mind is how smaller participants are going to deal with the complexity of the transparency rules and how and where they will implement the decision processes required to meet the regulations. The pre- and post-trade rules are detailed and specific by asset class or sub-class and firms will require an integrated, data driven decision process be implemented at the front end to have any chance of achieving compliance.
At a high level it appears that 25% of the RTS document is dedicated to asset class and market-specific threshold and timing rules that will require real-time access to the right data and robust automated processes to do the right thing with that data. Many firms don’t have this type of sophisticated technology in place, never mind the scrubbed and aggregated market and reference data required to assess the rules in the first place. We expect to see new participants in the market selling the data, the decision logic, or a combination of the two. This will mean more costs to trading desks – but will be necessary for firms that want to stay in business and even thrive in this new market landscape.