MiFID II – An Opportunity

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Introduction

The Financial Markets are accustomed to evolving regulation, which is just as well since the implementation date for MIFID II is now less than two years away. Originally planned for the 3rd of January 2017, the deadline for firms to fall into line with the new Directive has recently been extended until January 2018. This concession by the European Commission not only reflects the complexity and scope of MiFID II, which significantly increases the reporting and compliance burden for firms, but it also acknowledges the problem that large numbers of firms and regulatory bodies are simply not ready for the changes. However, firms are now expected to act without exception; the deadline extension provides adequate time to properly prepare and those firms that do take appropriate action now could soon reap the benefits of a fully integrated compliance strategy.

“MiFID II provides an opportunity to gain competitive advantage”

Approached in the right way, MiFID II provides forward-thinking firms with an opportunity to gain competitive advantage. Firms should not only consider how to meet their compliance obligations today, but should use this opportunity to implement open architectures and powerful new enabling technologies that anticipate future regulatory developments.

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Background

A weakness in the checks and balances within the financial system has been identified as a significant contributory factor to the financial crisis. MiFID was originally introduced in an attempt to prevent such crisis from recurring and to help create

a more competitive and integrated EU financial market; it has formed the cornerstone of the EU regulation of financial markets since its introduction in 2007. MIFID II aims to further harmonise investment services in the EU and provide increased investor protection with strengthened checks and balances and improved surveillance across the financial sector.

MIFID II has been designed to:

Minimise systemic risk

Provide robust levels of investor protection

Prevent market abuse

Improve transparency of over-the counter (OTC) markets

Increase market confidence and regional financial stability including the energy market

Extend transparency requirements to non-equity and equity-like products, including the energy market

Bring surveillance capabilities up-to-date with advances in communications technology

Introduce a harmonised EU rule-book to create a level playing field for trading venues throughout the EU

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Who Does MiFID II Apply To?

To combat the opaque nature of OTC trades, as well as the abuses within the carbon emissions market and the effects of speculation in the commodities markets, the range of firms affected by MiFID II has increased significantly. Together with a reduction in exemptions under article 2 (1) (k) in MiFID 1, many firms will now find themselves subject to the new regulations, such as:

• Firms that buy and sell Financial Instruments on behalf of clients

• Firms that trade on their own account where trading activity is not ‘ancillary’ to their core business. MiFID defines tests that can be used to determine if an activity is ‘ancillary’

• The scope of the instruments covered has increased to include some commodity derivatives for example

• New rules covering data providers and third country firms have also been introduced

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What This Means for Your Business

In a 2012 whitepaper entitled ‘MiFID – What is it and What Does it Mean?’ industry analysts KPMG wrote that:

“it is important that firms identify at an early stage which regulations they will need to comply with, determine how their business will be impacted, and effectively map a regulatory change pathway through the Governance, Operations and Technology requirements”

Meeting the challenges presented by MiFID II will require a root-and-branch review of business practices and operations.

Any required changes should form part of a multilateral strategy for meeting regulatory requirements; firms should not respond to evolving regulations in isolation. Overlapping compliance obligations can be identified across MiFID, Dodd-Frank, EMIR and REMIT and a unified approach to common requirements will allow firms to streamline compliance strategies across the business. Implementing open architecture technologies that use industry standards and support organisational change will enable firms to create a flexible platform that can adapt to an evolving regulatory environment.

“Any required changes should form part of a multilateral strategy”

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“It is no longer sufficient to record thebare minimum”

For example, a recognition that an effective surveillance function is key to good governance is common to many new regulations, including MiFID II. Under MiFID II, reporting requirements are increased across all areas of the business, including the need to effectively audit communications. Additionally, MiFID II requires that all communication resulting in, or intended to result in a trade, must be recorded. This covers any electronic communication involving the provision of the services listed in Article 16(7) of the Directive. This includes email, IM, SMS, fixed and mobile telephony. Firms need to be able to demonstrate to regulators that active measures have been taken to ensure effective monitoring of trader behaviour. It is no longer sufficient to record the bare minimum. Best practice now dictates that a continuous process of evaluation and analysis is required. Furthermore, despite recent clarification from the FCA, there are still questions surrounding the practical documentation of face-to-face meetings. These difficulties could be overcome if firms adopted a voice recording strategy for such meetings that fell under the same regime as all other communications.

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An Opportunity

When implementing new infrastructure to meet MiFID II requirements, firms can take advantage of the opportunity to introduce open architectures which will enable implementation of very powerful emerging analysis technologies.

These new technologies can enhance governance which, after all is the core intent of much developing regulation. The management of Conduct Risk is high on the FCA’s agenda. As Tracey McDermott, Acting Chief Executive of the Financial Conduct Authority (FCA), recently stated in a speech at a Bankers Association conference:

“We treat conduct risk like any other risk, and with a risk this big, you need to give us a very good reason why you are not taking proactive steps to manage it”

Analysis technologies are evolving at an accelerating rate. Sophisticated capabilities that support compliance teams, such as behavioural analysis, are advancing on a daily basis. Open architectures allow firms the freedom to adopt best-of-breed solutions as they emerge. Existing legacy infrastructures can hold firms to ransom for access to their own data (including metadata) and inherent vendor lock-in severely limits the choice of analysis tools to those supplied by the legacy vendor.

“…with a risk this big, you need to give us a very good reason why you are not taking proactive steps to

manage it”- the FCA

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What Should Firms Do Now?

The key to successfully managing any regulatory change is planning. Firms should take positive action to make sure they are ready to meet any new compliance obligations that may impact upon their business as a result of MiFID II coming into force.

Weston Digital Technologies believes that forward-thinking firms will see MiFID II as an opportunity; to reassess the changing landscape of regulatory compliance and to map out a unified strategic response. In a recent speech, Robert Taylor, Head of Wealth Management & Private Banking, at the FCA said:

“We have to move with the times, whilst still ensuring good consumer outcomes. The industry has to think a lot more about how the service they are providing clients helps to build and maintain trust….are we investing enough in the right technology to assure ourselves that we are quick, swift and part of the newly emerging modern world?”

Using advanced, open architecture technologies will enable these firms to keep up with evolving obligations and best practice trends whilst demonstrating a culture of transparency that goes beyond the minimum regulatory requirements. This will give early adopters of these technologies a real competitive advantage in the fight to regain investor confidence.

Key Steps:

1 Become familiar with the proposals and understand full scope of new requirements

2 Carry out analysis of business to determine areas of impact

3 Identify communications to be recorded and associated infrastructure requirements

4Consider a holistic, open architecture response to evolving regulations – MiFID is an opportunity to gain competitive advantage!

5Introduce advanced monitoring processes that ensure communications recording is not only compliant but sets a high bar for competitors

6 Introduce machine learning technologies to identify and root out behaviour associated with conduct risk

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Weston Digital Technologies will be monitoring the development of these proposed changes over the coming months and reporting any further announcements when the finalised implementation measures are published later this year. If you need impartial advice on implementing an open architecture solution for your business, please get in touch.

Our experienced team of communications recording professionals can:

• Work with you to identify communications that need to be recorded.

• Help you to create a monitoring regime ensuring continuous, effective surveillance.

• Provide analytic tools to automatically identify trader behaviour anomalies.

• Help you budget, plan and implement an effective surveillance infrastructure.

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About Weston Digital Technologies

Weston Digital Technologies has been developing communications recording and analytics technology for over two decades. Every day, our systems record many millions of vital transactions around the world.

Technology-driven, we remain at the forefront of innovation within the industry. Our Symphony recording and analytics platform has long been a leader in communications recording technology. Symphony 7 continues our tradition of providing product excellence and lifecycle value.

To us, a solution is much more than a combination of hardware and software - we go the extra mile to ensure we fully understand the individual needs of our customers. This enables us to make products that are intuitive, cost-effective and simple to use.

Serving both public and private sector institutions, we are trusted by some of the world’s most prestigious organisations, including central and local government, global telecom providers, financial institutions and defence organisations.

Together, our team is dedicated to making a real difference by providing our customers with outstanding levels of service and product excellence.

Weston Digital TechnologiesAtlantic HouseJengers MeadBillingshurstWest SussexRH14 9PB

Tel: +44(0)1403 783344Email: sales@westondigital.com

© Weston Digital Technologies 2016