A Year of Regulatory Monsters is on the Horizon

Posted by Cynthia Taylor on Mar 8, 2016 5:30:00 AM

In February 2016, the European Commission proposed granting national authorities and market participants one additional year to comply with the rules set out in the revised Markets in Financial Instruments Directive, known as MiFID II. The new deadline is 3 January 2018.

financial regulatory changesMiFID II rules were established to make financial markets more efficient, resilient and transparent, and to create a more stable environment for securities markets, investment firms, and intermediaries, as well as trading venues in the EU. MiFID was created in response to the financial crisis, and MiFID II aims to address, reinforce and replace existing outdated European rules for securities markets.

Given the vast amount of data, which needs to be obtained and processed to meet the new requirements, significant IT changes and system developments will need to be put in place, which the commission acknowledged will take longer than initially envisioned. Financial intermediaries, such as investment banks, in large part, will bear the brunt of responsibility under the new requirements at all levels of their organizations.

Jeremy Taylor, Strategy Owner, Capital Markets, GFT breaks down the directive into three core pillars focused on investor coverage: fairer, safer and more efficient markets; stronger investment protection; and greater transparency.

The European Commission explicitly states that MiFID II aims to:

  • Ensure that trading takes place on regulated platforms;
  • Introduce rules on high-frequency trading;
  • Improve the transparency and oversight of financial markets, including derivatives markets, and address the issue of price volatility in commodity derivatives markets;
  • Improve conditions for competition in the trading and clearing of financial instruments; and
  • Build on rules already in place to strengthen the protection of investors by introducing robust organizational and conduct requirements.

These objectives are quite daunting when you consider that according to the European Commission, the European Securities and Markets Authority (ESMA) will have to collect data from about 300 trading venues on over 15 million financial instruments. I’m not sure I’ve seen such wide-ranging regulatory legislation since Glass-Steagall.

MiFID II is also introducing changes to transaction reporting requirements with the number of fields to be reported on increasing from 21 under MiFID I, to at least 65 under MiFID II, to include new financial instruments, as well as additional data. The reporting audiences will also become more numerous and more precise, posing additional challenges.

Life would be so much easier if there were a “one-size-fits-all” approach to addressing and complying with these new requirements, but every organization will need to develop a system that is relevant to their business. Mr. Taylor surmises that “regulation does not necessarily lend itself to being broken down into a functional model, since it is very much a ‘front-to-back' view. These new rules, in turn, generate conflict in terms of ownership of delivery and compliance. Even tracking this ownership across an organization at a macro level can be a full-time job."

Honestly, I really don’t know how any financial institution will be able to comply with these monstrous new data requirements, coming from who-knows-what department, to be reported to various and sundry actors, without a content automation tool, which can normalize data, synchronize content and produce multi-channel publishing.

Given that firms will need to do an exhaustive review of their processes and technology structures before even thinking about the output to be generated for the regulators, the whole industry must be breathing a collective sigh of relief for the one year grace period granted by ESMA. Putting automation in place today, to allow you to address the needed process changes in advance of the rapidly accelerating compliance challenges just around the corner, will certainly take some steam out of the pressure cooker. That is before the lid blows off!

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Topics: Fund Regulatory Requirements