Winston Churchill probably doesn’t spring to mind when considering Markets in Financial Instruments Directive II (MiFID II), but his famous Battle of El Alamein description – “This is not the end, it is not even the beginning of the end, but it is, perhaps, the end of the beginning” – fits the new EU regulation nicely.
Now we’re past MiFID II’s 3 January D-Day (sorry Winston), data management practitioners may be tempted to breathe a sigh of relief over its relative success. Some companies may already be scaling back their MiFID II teams, but work on the regulation is far from complete. So, what data management challenges remain, and when can firms expect to extract business benefits from the regulation?
The impact of MiFID II, which requires every instrument traded in Europe to have a set of reference and reporting data, has been huge. John Mason, global head of regulatory and market structure propositions at Thomson Reuters, estimates that around 3 trillion new data points have been introduced as result of MiFID II. And the change keeps coming. Last month, the European Securities and Markets Authority (ESMA) introduced MiFID II trading restrictions relating to the double volume cap (DVC). In June, it will bring in its six-month-delayed requirement for mandatory identity codes or Legal Entity Identifiers (LEIs) to be used across financial transactions. And in September, it is due to rule on which investment firms need to become Systematic Internalisers (SIs) based on trading volumes.
In the meantime, MiFID II practitioners and observers point to plenty of live data sourcing, reporting, standardisation and consolidation issues. Which is inevitable, says Peter Moss, CEO of regulatory and trading reference data provider SmartStream RDU, considering the scale of MiFID II. He says: “The regulators have defined how data needs to be collected, but it’s coming from several hundred organisations. The reality is that several hundred organisations don’t end up having the same interpretation of what the standard is, not initially. The biggest problem we’re facing is just the bedding down of all of that new data.”
By way of example, Moss cites: “Definitional challenges around ISINs – the unique number that is used to identify instruments – how should they be allocated? Take an FX swap. The market would like to report that as two items because the industry generally feels that is the better approach, but the regulation says one, so there’s a conversation going on around that.”
Another live issue Moss notes around data fields. He says: “ESMA says a data field is optional, but when it comes to a certain type of instrument it’s actually not. Take the maturity date on an interest rate swap. The maturities attribute is not relevant for some fields but is relevant and necessary for an interest swap, and some venues aren’t supplying it. Occasionally you get attributes that are just incorrectly understood so you get invalid fields in the attribute.”
Mason agrees there are problems to deal with. He points to issues such as whether an instrument has been deemed traded on a trading venue (TOTV), and therefore whether it is reportable. Also, how instrument classifications are made. Mason classes these issues as ‘teething problems’, but they do still need work. As Moss warns: “A lot of firms decided that after 3 January, they would start to wind down their MIFID teams. The reality is you can’t stop, this is still an actively changing space and I think MIFID projects will be required for most of this year. They’ll need to continue to fix the things that aren’t quite working and stay aligned with the tweaks that ESMA and the regulators are putting out there.”
Beyond the teething problems
Looking forward, as well as ongoing ‘tweaks’ in the DVC, LEI, SI and other areas, the likelihood is that ESMA and other regulators will introduce more significant changes once it has reviewed the initial impact of MiFID II.
For example, Moss believes there are about 9 million instruments in the Financial Instrument Reference Database System (FIRDS), the EU’s consolidated source of financial reference data. But he says: “We have a client that expects the number of instruments to go up to several 100 million and, to be honest, there are organisations that are already struggling with data volumes. I think data volumes will grow to the point where ESMA might choose to moderate FIRDS to prevent volumes becoming too large.”
Mason too predicts major change as a result of MiFID II. He says: “I think we’ll see some fundamental shifts, as well as things just coming out in the wash. The inconsistencies across regulators on deferral periods for reporting mean we may see ESMA step in and say everything’s going to be deferred across Europe in an equivalent way.
“Changes should be about levelling the playing field. We have some Approved Publication Arrangements (APAs) that initially published data without necessarily feeling the need to do any validation, correction or enrichment to the data. The publication of data needs to become more consistent and drive greater transparency.
“Also, the level of transparency in the market isn’t what people were expecting it to be, either because data is not consistent or there isn’t enough data, and that’s potentially down to ESMA and the National Competent Authorities (NCAs) in terms of waivers, deferrals, large-scale block trading, all the things that are preventing publication of instruments to the marketplace for perfectly valid reasons. We may see some fundamental moves there and I suspect the move towards a consolidated tape in Europe is almost inevitable.”
Another unintended consequence of MiFID II is that ESMA’s FIRDS database is taking on the role of providing golden source reference and reporting data, despite the regulator’s opposite intention. As Moss says: “ESMA’s FIRDS database isn’t supposed to be a golden source, which ESMA has been very clear about, but the truth is, the data in the FIRDS database is absolutely essential. It’s coming from hundreds of organisations and there is no easy way for anybody else to actually pull the data together. So, ESMA may not want FIRDS to be used for golden copy, but there is no other source of the data, so it has inevitably become golden copy.”
Mason agrees: “For all ESMA’s comments about FIRDS not being a golden source, it would take a brave organisation to step away from whatever the regulator is classifying something as and say, ‘we think it’s something else’. It may happen over time, but it’s going to take an ongoing dialogue with the regulator to come to a consensus.”
One concern around MiFID II’s teething troubles and potential future change, is that data managers will be preoccupied with this and, perhaps, take their eyes off the prize of extracting business benefit from all their regulatory work.
Considering this, Mason sees a route to achieving benefits through data standardisation enforced by MiFID II and other regulations. He says: “If I were a data manager, I would be pushing my organisation to adopt standards, because we know regulation is not going away. The concern is that regulators have asked for the same thing three different ways, and people have responded to this on a regulation-by-regulation basis. But there’s no reason why the Alternative Investment Fund Managers Directive (AIFMD) should be treated differently to MiFID II and European Market Infrastructure Regulation (EMIR). We should be able to classify financial instruments in the same way across the industry and I think we’ll see regulators starting to standardise taxonomies and classifications.
“LEI codes are a standard, ISINs are a standard. There are certain codification areas where standardisation can start. For data managers, there is a business benefit in that because once you start standardising, you start being able to get a more holistic view of your data. Your data can start going to work for you, you can start mining your data as a data treasure, not just to support a financial process.”
Mason contrasts financial services firms to data-led businesses such as Google or Yahoo. He says: “There is value in our data. If you think of the transactions that financial institutions make and the resulting details they have on us as individuals, there is richness in datasets, but I don’t think we necessarily tap into that enough. Google, Yahoo, these new businesses, make money from data and I think that will start to influence thinking in the financial services industry as to how data and the management of data can lend itself to business benefit. MiFID II hasn’t been implemented to drive that, but it’s a healthy by-product.”
Moss suggests firms could benefit from MiFID II long-term by putting in place strategic and sustainable regulatory data management systems, rather than making tactical changes for each regulation. He says: “Data managers need to continue to fix the things that aren’t quite working and stay aligned with ESMA, but a lot of firms have thrown stuff together, they’ve got infrastructure and a set of processes, but they’re not necessarily robust and sustainable for the longer term. Some of them may be a bit clunky from a technology perspective. Firms are starting to look at this and what they can do to make sure the processes they’ve built are suitable for the next 20 years. This is an going requirement, it’s not going to go away.”
In the short term, however, Mason suggests the focus needs to be on the here and now. He concludes: “Over the next few months, MiFID II will be all about best execution. Are firms sourcing the data they need to demonstrate best execution, are they monitoring best execution, and are they providing clients with a high level of service here? This is where competition lies. Similarly, do firms have all the data they need for transaction reporting? I don’t think this is done and dusted and, three months in, not many firms, if any, can say ‘yes, transaction reporting is a well-oiled machine with all of the data attributes we need’.