By Boyke Baboelal, Director of Data Services at Asset Control
The delay to the implementation of Markets in Financial Instruments Directive II (MiFID II) – now pushed back to January 2018 – gives institutions a chance to take a different approach. While many of the issues regarding MiFID II are still up in the air, including instrument identification and the creation of new aggregate data services, the principles of data integration and reporting are, in essence, no different from those required for other regulations, such as Packaged Retail and Insurance-Based Investment Products (PRIIPS).
Organisations now have the opportunity to build a single infrastructure, a single security master that will support multiple compliance requirements – if they have the right data architecture – and put in place a solid foundation to prepare not only for MiFID II, but also for other contiguous regulations.
The update to MiFID II builds on rules already in place to reflect developments in the trading environment since the implementation of MiFID in 2007 and, in light of the financial crisis, is designed to improve the functioning of financial markets, increasing efficiency, resiliency and transparency.
With the scope of the regulation now extending to derivatives, structured finance products and emission allowances, the data implications are significant. Pre-trade transparency and reporting will require firms to improve market data in order to publish quotes; post-trade reporting is now mandatory across practically every asset class within a very tight timeline and in line with European Securities and Market Authority (ESMA) technical standards; while new venue reporting will demand organisations gain an accurate insight into market share to determine Systematic Internaliser status.
There are several challenging outstanding issues to address – from the need to standardise identification codes for non-equity instruments to the creation of new categories of data services providers for trade reporting. However, there is also clear overlap between the reporting demands of MiFID II and other regulations including PRIIPS, with its requirement to push out client updates, and Market Abuse Regulation (MAR) with its market data needs. The decision to push back the compliance deadline provides organisations with a golden opportunity to get their master data in great shape to support not only MiFID II, but also a number of other regulations.
Creating Master Data
The extension of MiFID II beyond traditional equity and bonds to include all financial products, combined with the far more complex pre- and post-trading demands, underlines the need for a single, high quality security master. From tracking instrument reporting via liquidity classification to tracking product and counterparty master data fields required in line with the ESMA technical standards and cross reference instruments, and creating a complete record and audit trail of available market data for trade reconstruction requirements, organisations need a new depth and breadth of information across the entire product portfolio.
The security master will require the integration of multiple data sources to provide a full history of all financial products – from product description to quote, where it is traded and
where it is reported. In addition to combining data from multiple different systems and sources, from transaction reporting to risk systems, institutions will need to add in reference data to create the depth of information required for the new pre- and post-trade reporting.
It is clear that the depth, breadth and complexity of not only the data requirements, but the way in which this data needs to be rapidly yet accurately aggregated and reported upon, will require a strong common data foundation. And this is something that can only be achieved through the deployment of third-party technology, such as enterprise data management (EDM).
Moreover, through establishing this strong data foundation and architecture, institutions will be well placed to resolve the one key area that still needs to be addressed in order to successfully integrate multiple sources of data: the creation of unique identifiers.
While there are discussions in the market today about the extension of the ISO standards ISIN for non-equity products, there is still support for an alternative standard, the Financial Instrument Global Identifier (FIGI). In addition, Market Identifier Codes (MIC) must be used for the now broader requirement of venue identification. Institutions simply cannot use the continued debate regarding instrument identification as an excuse to delay the creation of the single security master: with the right infrastructure model, cross-referencing will be possible whichever identification standard – or standards – is adopted.
In addition to the internal source systems, this data infrastructure will also be able to support the inclusion of third -party providers for pre- and post-trade transaction data, as well as trading venues providing product reference data. This will include existing partners such as Bloomberg and Tradeweb, as well as new categories of data service providers for trade reporting, including Approved Publication Arrangement, Approved Reporting Mechanisms and Consolidated Tape Providers, as well as data from ESMA itself.
With standard terms and conditions defined for each product, organisations will have a platform to support not only MiFID II compliance, but also diverse regulatory and operational requirements. For example, it will be far easier to feed the required information into the PRIIPS documentation production platform to create terms sheets for each client; while the market data required for MAR should be automatically to hand.
The ability to reuse data enables an institution to support different business processes including PRIIPS and MAR today, as well as new regulatory demands in the future. It also offers significant operational benefits outside regulatory compliance. While the arrival of new market data sources and an era of heightened reporting means institutions will have to operate in a far more public environment, there is another side to the reporting obligation: the new market data sources offer real benefits for firms looking to improve the evaluation of risk processes or client discovery. Therefore, organisations need to ensure an EDM strategy is in place to leverage security master data for improved internal efficiency and risk assessment.
The delay to January 2018 offers financial institutions a real opportunity. MiFID II compliance demands that the scope of the security master is extended to all financial products – and firms will be well advised to use technology such as EDM to create one consistent database that feeds into several business processes in order to attain far broader and longer term benefits.
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