MiFID II DOCUMENTING A TARGET OPERATING MODEL (TOM) The Markets in Financial Instruments Directive, more commonly known as MiFID II, is one of the most talked about regulations in the financial services sector. Its impacts are far-reaching, both in terms of the macro structure of the overall financial markets and the internal functional areas within the financial institutions themselves. With the deadline for MiFID II compliance having already been delayed by a year to January 2018 in response to concerns about the complexity, implementation programmes should already be well underway in most financial institutions.

For those that haven’t yet fully embraced MiFID II compliance, the main things to consider are data quality, rigorous and efficient end-to-end testing, and the impact on existing processes and models across firms’ operating models. Brickendon’s significant expertise in this area puts us in a good position to help financial institutions overcome these challenges and avoid both the potential penalities for non-compliance and the pitfalls associated with change.

In this, the first in a series of insight documents looking at MiFID II compliance, we consider the importance of implementing the correct Target Operating Model (TOM).

2

WHY CHANGE YOUR OPERATING MODEL?

MiFID II is driving the need for operating model enhancement or even the development of new target operating models across two dimensions:

• Direct – MiFIDII specifically mandates change in organisational policies and procedures in multiple areas, including algo trading, product governance and customer suitability. (More details in Fig. 2, page 4 ) These requirements will be delivered as a direct result of adapting to the required regulatory framework.

• Indirect – Under MiFID II, banks and other financial services organisations must ensure that any information imparted to clients and regulators is both accurate and controlled. In addition, regulated

entities will need to be able to show both the accuracy and completeness of their data. This overarching requirement will necessitate new roles and responsibilities across organisations in all areas, for example, regulatory middle office and trade data quality teams.

Although firms are currently tending to focus on critical ‘Day 1’ delivery, they will need robust governance and operational frameworks to ensure MiFID II compliance after the ‘Go-Live’ date in January 2018. Correctly documenting an operating model is the first step towards being ready for ‘Day 2’.

The key challenges when documenting model change under MiFID II

Challenge Explanation Examples under MiFID II

Implicit requirements MiFID II doesn’t have a single, overarching requirement for TOM development. Drivers for operating model change are, to an extent, embedded in the regulatory text in various areas of the MiFID II framework.

• Direct requirements - Product governance, suitability and appropriateness.

• Indirect or implicit requirements - It is assumed that the firms will set up a process to manage exceptions coming from Approved Regulatory Mechanisms (ARMs), Approved Publication Arrangements (APAs), or the National Competent Authorities (NCAs) and resolve them on a timely basis. These requirements are either undefined or different based on different jurisdictions.

Lack of focus Due to the current focus on ‘Day 1’ technical implementation, there is no systematic focus across regulated firms on operating model development or enhancement.

• Informal discussions with clients indicate that firms are still grappling with issues related to technology delivery, such as vendor changes, Trading on a Trading Venue (TOTV), testing of International Securities Identification Numbers (ISIN) and cost and charges requirements. As a result, they are not able to focus on a TOM.

Cyclical dependencies An effective operating model should be based on coherent, logical business and technical architectures. However, under MiFID II, incomplete implementation of operating model change may lead to higher business and technology overheads.

• Maintaining the quality of data sent to regulators is a key requirement for MiFID II (transaction and trade reporting). However, ‘quality’ is not clearly defined and an overly aggressive approach to developing a TOM may lead to expensive implementations.

Short-term goals Due to time constraints and competing delivery priorities, most firms are focused on changing the operating model based on short-term goals, rather than carefully considering the long-term benefits of implementing ‘holistic’ changes to the operating model.

• Informal discussions with clients reveal that all firms are first and foremost focused on ensuring ‘Day 1’ regulatory compliance.

• However, given that MiFIDII data requirements are more stringent than similar regulations (eg. ’No Legal entity Identifier (LEI), no trade’, ‘No ISIN, no reporting’), a small number of firms are actively considering how best to leverage this data for competitive advantage.

3

DOCUMENTING A TOM - THE BRICKENDON APPROACH

Advise. Change. Do.

Developing a TOM is not all about getting to the desired end state. It should instead focus on the steps that are required to get to that desired end state and ensure all the

steps in the process are making positive enhancements to the business model as it is developed.

These drivers do not stand alone. Changes made to the TOM in order to comply with MiFID II will automatically lead to improvements in other areas because of the product scope or standardisation of reportable attributes (e.g. ISIN) that may have previously been unavailable.

In particular, data-based metrics such as client profitability and market share analysis will benefit from improvements to data accuracy brought about by MiFID II compliance. The firms that are able to leverage these changes and use them to their advantage across their business will most likely emerge as the winners in the post-MiFID II world.

While certain areas, such as instrument golden sources (ISIN), client onboarding (LEI) and standard trade economics, will without doubt improve as a result of MiFID II compliance, tight timelines mean it will not be feasible for most organisations to immediately expand MiFID II-driven data quality improvements to non-MiFID II areas. However, to achieve long-term competitive advantages, firms must actively embrace these business drivers.

There are four primary drivers for a MiFID II-compliant TOM: improved controls; improved efficiency and therefore reduced costs; regulatory requirements; and increased revenue.

Fig. 1: Primary operating model drivers

MiFID II regulatory drivers can boost revenue

Step 1Key drivers behind a TOM

Operating Model Drivers

Controls E�ciency

Regulation Revenues

Controls E�ciency

Regulation Revenues

Controls E�ciency

Regulation Revenues

Controls E�ciency

Regulation Revenues

4

All operating model change impacts external and internal stakeholders and the MiFID II TOM is no different. Externally it will impact a firm’s clients, regulators, vendors and partners, while internally, the impact is likely to be even more extensive. Firms will need to grasp the impact

on the roles and responsibilities of their people, processes and procedures, policies and IT estate. To do this, they need to adopt an incremental approach and deliver a TOM in a methodical manner.

Step 2Who is impacted by a TOM?

Now it is time to formally document a desired TOM by dividing it into the following six sub-steps:

Step 3 Document a desired TOM

STEPS 1-6 INPUT OUTPUT OWNERS

1. CHANGE REQUIREMENTS

• Business requirement documents

• Business area impact matrix • MiFID II streams SMEs

2. FUNCTIONAL• Functional requirement

documents• List of functions• Functional area impact

• MiFID II Streams SMEs

3. CAPABILITY VS FUNCTIONAL ANALYSIS

• Existing policies and procedures

• List of functions

• Capability vs functional matrix

• Impact assessment matrix

• Process owners• MiFID II streams SMEs

4. FUNCTIONAL DESIGN

• Capability vs functional matrix

• New functional model • Architects• MiFID II streams SMEs

5. SUCCESS CRITERIA• New functional model • Signed-off deliverables

• Resourcing plan• Technology impacts

• Operating model SME/Project manager

6. DELIVERY ROADMAP• Signed-off deliverables• MiFID II project plans

• TOM project plan • Operating model SME/Project manager

The MiFID II ecosystem is wider than just the firm itself. It involves APAs, ARMs, various vendors and regulatory bodies. When building controls, the investment firms should consider existing controls being used by these

firms and leverage them where possible. The firms should devise a clear strategy on what to build internally versus what existing architectural components to utilise.

MiFID II Considerations

The first three steps of a MiFID II TOM are best left to the experts, with a Project Manager (PM) guiding the process. For the remaining three steps, the PM should

drive the architects’ decision-making, the buy-in from functional managers and the business, and ensure the operating model is delivered.

MiFID II Considerations

Fig. 2 Areas Impacted by MiFID II Target Operating Model

IT Compliance Front Office Ref Data Operations

Transparency/Transaction Reporting

Investor Protection

eTrading

Market Structure/Venues

Commodities

Highly Impacted Moderately Impacted Slightly Impacted

5Advise. Change. Do.

Continuous improvement is iterative in nature and is dependent on previous steps being designed in an optimal way to allow for improvements. As an example, if

the functional design is set up to only consider the drivers for stage 2, then the continuous improvement will fail to deliver desired outcomes from the final stage.

Step 4Review and continuous improvement

STAGE 1

TECHNICALDELIVERY

Tech Compliance

Operational Compliance

Business Optimisation

Tech Compliance

Operational Compliance

Business Optimisation

BASIC TARGETOPERATING MODEL

STAGE 2

STAGE 3

Tech Compliance

Operational Compliance

Business Optimisation

ADVANCED TARGETOPERATING MODEL

Fig. 3: Implementation stages

Technical compliance: MiFID II technical solution is in place but the organisation is not designed accordingly

Operational compliance: the organisation is designed to support MiFID II compliance operationally

Business optimisation: the organisation is set up so areas outside of the MiFID II remit benefit from the changes

Given the time pressure, it is difficult to convince stakeholders about the merits of a full-scale TOM. As a result, the key is to think strategically but build incrementally. Ideally, a TOM’s functional model should

be flexible enough to expand in the future, but if the components are not intitially going to be scalable, this should be recorded and revisited at a later stage.

MiFID II Considerations

6

THREE-PART BRICKENDON SOLUTION

At Brickendon we advocate a holistic delivery approach, which not only looks at regulatory drivers but also focuses on other areas. The foundational Business as Usual (BAU) TOM design (as pictured below) is scalable. It can be expanded to include other regulations as well as discretionary controls. Furthermore, as described in

Step 1 on page 3, it can be applied to external-facing analytics to positively impact revenues. As challenges are encountered, they should be documented to ensure problems are resolved using Brickendon’s bespoke approach, including our innovative toolset delivery.

As part of documenting a TOM, we provide examples of potential business and functional maps which can quickly be customised to meet customers’ needs. This leads to a faster turnaround in capability and functional gap analysis. Similarly, Brickendon’s expertise in designing functional

architecure provides firms with an insight into current industry thinking and leads to faster agreements with the stakeholders, thereby reducing the overall time taken to create a BAU TOM.

1. Holistic design

2. Customised delivery

Unclear requirements

Capabilities vsfunctional matrix

Structured documentation approach

Cyclicaldependency

Functionalmodel

Structured documentation approach

Short-termgoals

Staged drivers

Shared roles & responsibilities

Clear drivers

Documentationapproach

Lack of focusShared roles & responsibilities

Iterative plan

Impact analysis

CHALLENGES APPROACH TOOLSET

Fig 4: The foundational Business as Usual (BAU) TOM design

7Advise. Change. Do.

3. Reuse and Recycle

i) Systems To reduce the overall burden of regulatory implementation it is vital where possible, to leverage existing architectural components and adapt these to

suit the MiFID II regulations. Brickendon’s significant experience in architectural design and implementation means we are well-placed to help you quickly leverage existing systems and build a TOM around them.

ii) People and Processes Leveraging existing people and procedures has three benefits: 1. A streamlined team to create a BAU TOM

2. A BAU TOM that is consistent with the overall implementation of MiFID II

3. A governance structure that is shared with overall MiFID II governance

There is no doubt that MiFID II compliance is a significant challenge for many financial institutions and that failing to prepare and act now could place them in a difficult position in the future. While it is easy to focus purely on Day 1 compliance, it is important not to overlook the

benefits of devising an effective and coherent TOM from the outset that will not only help businesses become compliant, but also deliver operating efficiencies and revenue-generating opportunities for the future.

Fig 5: An example of typical architecture for MiFID II compliance. A MiFID II data hub can stand alone or be shared with other existing regulations such as EMIR or Dodd Frank.

EXTERNAL AGENTS

Clients, Counterparties & Venues Trade Booking

Internal Ref Data

ESMA External Ref Data

INTERNAL ORDER/TRADE SOURCES

Data Sources

Order Management

Market Data ISIN ESMA ANNA DSB

Sales Trader Workflow

Controls Workflow

Pre/Post Trade

APA (Pre/post

Transparency)

ARM (Txn reporting)

Best Ex (Trading Venue)

Algo (Trading)

Limits Report (Commodities)

Pre/Post Trade Pre/Post Trade

MiFID II Data Hub

And finally...

© 2017 Brickendon Consulting Limited. All rights reserved. In the absence of specific statements to the contrary, copyright for this publication vests in Brickendon Consulting Limited. Brickendon grants permission for the browsing of this material and for the printing of one copy per person for personal reference only. The express permission of the copyright holder must be obtained for any other use of this material. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication.

info@brickendon.com www.brickendon.com +44 203 693 2605

Brickendon is an award-winning transformational consultancy specialising in innovative solutions that solve our clients’ challenges quickly and efficiently. We are experts in digital, data and automation, with a particular focus on DevOps and agile methodologies, digital transformation, rapid prototyping, product development and the automation of support and business/IT processes. Our aim is to disrupt the market with the latest machine learning, automation, data analytics advisory and programme delivery. We do this in weeks and not months, saving our clients time, money and protecting their reputation.

WE SOLVE YOUR CHALLENGES

Why choose Brickendon?

Our track record: We have demonstrated a long, proven track record of transforming our clients through our innovative bespoke solutions.

Our innovative approach: No one client is the same therefore our intelligent, experienced and focused consultants use their domain experience to address each challenge in an innovative way, using skills from their past and knowledge from Brickendon’s continual learning hub.

Our resources: Our onshore, offshore and nearshore capabilities mean we are well placed to cater for all our clients’ needs, making the best use of our consultants’ 10 years-plus domain experience.

Our passion: We love what we do and thrive on improving our clients’ profitability, efficiency and increasing their competitive edge. We are driven to develop the most innovative solutions and take pride in seeing the tangible benefits of a project come to fruition.