The compliance deadline for the European Union’s Markets in Financial Instruments Directive II (MiFID II) may yet be pushed back a year to January 2018, but the need to tackle the data management challenges of MiFID II is immediate, whatever the European Commission’s final decision on deadlines.
The regulation is much broader than the initial MiFID regulation, which was introduced in 2007, and aims to improve the competitiveness of European markets by creating a single market for investment services and activities, and ensuring protection for investors in financial instruments. The most sweeping changes made by the directive include the extension of MiFID requirements covering equity trades on regulated markets to non-equity instruments traded on any trading venue, greater demand for pre- and post-trade transparency, and the inclusion of systematic internalisers and other investment firms that trade financial instruments over the counter in the expanded pre- and post-trade transparency regime.
The timeline of MiFID II sets 3rd January 2017 as the compliance deadline, but industry calls to the European Securities and Markets Authority (ESMA) for more clarity on implementing the directive, and acknowledgement from the European Commission of the vast amount of work that must still be done to ensure the regulation runs efficiently, look likely to delay compliance until January 2018. A final decision on the deadline by the Commission is expected in coming weeks, but any delay is not, as industry experts explain below, a reason to slowdown projects dedicated to the data management challenges of MiFID II and is, instead, an opportunity to take a more strategic than tactical approach to compliance.
More detail about MiFID II can be found in the third edition of A-Team Group’s Regulatory Data Handbook. To find out about the practical considerations of implementing the directive join A-Team’s MiFID II webinar on 23rd February.
MiFID II Delay: A False Sense of Security
Colin Ware, Regulatory SME – Reference Data at Barclays Wealth and Investment Management, says: “Any postponement of MiFID II will not make much difference. An extra year before compliance could help banks make more strategic decisions around solutions rather than making tactical fixes, but there is still so much to do that the time would be swallowed up.” Chris Johnson, Senior Product Manager, Market Data at HSBC Securities Services, agrees, saying: “The danger of any delay is that it could create a false sense of security with firms unwittingly deciding to start tackling the data management challenges of MiFID II when it is too late to put in place the necessary remediation and outreach. Delay could also make regulators less forgiving about any data gaps that appear in transaction reporting when it commences. The final Regulatory Technical Standards on reporting requirements are expected to be published during the first quarter of 2016, so it should be possible to make concrete delivery plans at that point.”
If time is one concern around MiFID II, complexity is another. Christian Voigt, a Senior Regulatory Adviser at Fidessa, says: “The big picture is very complex, more complex than European Market Infrastructure Regulation (EMIR). MifID II is different because it touches on so many more aspects, including organisational requirements for investment firms and infrastructure providers, how trading venues can operate their markets, and how technology is implemented and maintained.”
Ware adds: “MiFID II is big and complex. There are complexities around calculations that have not previously been required, such as those associated with systematic internalisers that require reference data and data from many different trading systems. Similarly, the sheer size of the directive and the extent of its coverage, including instruments that have never been reported on this scale before, suddenly makes reporting very difficult.”
Specific Data Management Challenges of MiFID II
Looking at specific data management challenges of MiFID II, the experts name issues including sourcing data, accommodating any changes to securities identifiers agreed by ESMA – ISINs are currently the only securities identifiers noted in the directive – and managing new requirements such as attaching traders’ names to trades and uploading all transactions data to a central ESMA database that has yet to be established.
Johnson describes the primary data challenges for financial firms and trading venues as data gaps and licensing. He explains: “There are a number of new data fields and a significant extension is required for others. In many cases, the required data does not exist, or it is not yet fully formed, so firms need to be proactive and use all the time that’s available to close the gaps.
“Data gaps can be addressed by establishing the assets and entities that require data and then performing coverage checks at the earliest stage possible. The data field requirements are detailed publicly in the ESMA consultation papers and, even though the fields are not confirmed as final yet, the regulatory expectation is that firms act immediately. Regulators do not expect firms to wait until the requirements have been set in stone before taking action. Licensing requires firms to check that the intellectual property rights over the data fields are understood and complied with.”
Ware identifies securities identifiers as another data management challenge of MiFID II, particularly in the wake of ESMA’s recommendation that all instruments should be identified using ISINs. He says: “Some asset classes don’t have identifiers or use internal identifiers. Using a market standard like the ISIN to identify all instruments is a great idea in theory, but a huge practical problem as many more ISINs will have to be created and more may be needed as instruments change.”
Are ISINs the way to go for MiFID II?
Ware questions whether ISINs are the way to go and whether the agencies that issue the identifiers will be able to meet the kind of volume requirements expected as a result of MiFID II. Like other industry participants, he is watching and waiting for a response from ESMA on industry proposals for a combination of securities identifiers to be used for MiFID II compliance.
The MiFID II requirement for ESMA to gather and hold all transaction data in a central database for use by firms within the scope of the directive is also under scrutiny. Ware is concerned about whether ESMA has the capacity to develop such a database and questions remain about how accessible the data will be and what costs, if any, it will carry.
Linking trades to traders and firms is also expected to be a massive data headache as it has never previously been required. While employee information is available in firms, submitting it to regulators or exchanges adds issues of confidentiality and data security. Getting this right will be a huge undertaking, getting it wrong could be equally punitive.
Addressed individually, the data management challenges of MiFID II may not require rocket science solutions, but it is their interdependency under the directive that makes them pieces in a large and complex puzzle. The final Regulatory Technical Standards from ESMA should ease the data management burden, and a decision on deadlines should help firms pace their compliance projects. For firms with strategic ambition, successful implementation of the directive should improve performance and could open the way to developing new services and apps based on the data and management required for MiFID II compliance.