MIFID II Becoming a Reality

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MIFID II Becoming a Reality

Joe Turso, VP, SmartStream Technologies

Joe Turso, VP, SmartStream Technologies

The need for being compliant with The European Union regulations for the Markets in Financial Instruments Directive (MIFID II) and the Regulation (MIFIR) is becoming a reality for most financial institutions as they try to determine from a technical, operational and reference data perspective how they will confirm to meet these new regulations.

While the goals of MIFID / MIFIR are straight forward

► Provide fairer, safer and more efficient markets
► Achieve greater transparency for pre and post trading activities
► Realize strong investor protection by improved disclosure to strengthen the best execution

the impact on financial institutions is broad, affecting pre-trade reporting, post trade reporting and transactional reporting.

Aside from new reporting procedures, these regulations introduce many new acronyms.

"Our goal as a utility model is to provide a service that reflects the similarity and diversity of requirements so clients can benefit from this collective knowledge"

MIFID II requires any firm issuing new products to register these products with the European Securities and Markets Authority (ESMA) and its National Competent Authority (NCA).

The new regulations also introduce the concept of a Systematic Internaliser (SI). These are investment firms that on an organized, frequent, systematic and substantial basis execute client orders outside a regulated market. Any SI needs to provide price transparency for the instrument pre-trade and trade at that price unless a waiver can be applied.

In addition, there are post trade reporting requirements. For a transaction, one of the counter parties need to report trades within 15 minutes of execution either directly to their NCA or through an Approved Publication Authority (APA).

Lastly, there is also transaction-reporting requirements. All counterparties need to report transactions clearly identifying what was traded and the parties involved in the trade either direct or through an Approved Reporting Mechanism (ARM).

The reference data challenges associated with MIFID II are significant due to two primary reasons. First, these regulations are broad reaching in terms of coverage from a securities perspective. They include all “Equity Like” products, Fixed Income, Derivatives and OTC transactions.

For reporting purposes, these new securities and transactions will have to be assigned Legal Entity Identifiers (LEI) and ISIN codes. For the derivatives and OTC transactions, this will be a new practice.

The authoritative steward for LEIs is the Global Legal Entity Identifier Foundation (GLEIF). While LEI is inherent in many Financial Institutions reference data platforms for listed products, this practice will need to be extended to all transactions and to all types of parties involved in a transaction such a counterparty, reference entity and issuer.

For ISINs, the challenge will be the assignment of these identifiers to derivative securities and OTC transactions. The definitive source for these ISINs will be the ANNA Service Bureau. The industry is eagerly waiting specifications from ANNA regarding its service that will provide assignment of the ISIN to derivative securities.

The complexities associated with over the counter transactions go beyond identification. A bank needs to determine if a security has the same economic characteristics as a listed derivative security. If it does then the transaction needs to be applied to the bank position limits. Reference data is critical to this process. That’s why the RDU is including comprehensive sourcing of reference data for exchange trade derivatives as part of its utility solution.

The second challenge is the implementation specification from regulatory agencies such ESMA and ANNA are not completely defined. There is a dependency on reference data that these agencies will be providing, which are not yet live and not completely defined.

With a looming date of January 2018 for implementation of these regulations what approach is the RDU taking to allow its clients to meet these challenges?

You need to start now, make assumptions and be nimble. Given the importance of these regulations and the impact to your business you cannot wait to begin adoption. Engage a solution provider now and start your internal projects now. In conjunction with our clients, we are defining test and mock data to simulate how we expect to receive data from ESMA and ANNA. We are building f lexibility into our data model and processes to accommodate change. Financial institutions should be planning on doing UAT testing in the 2nd Qtr. of this year in anticipation of industry testing in July.

Financial institutions should talk to each other. The ESMA Regulatory Technical Standards (known as RTS) are significant in terms of documentation and detail. It helps to get others opinions in terms of understanding and interpreting these regulations. While we see a significant overlap in requirements by clients, each client brings a unique perspective in what they require as a solution. Our goal as a utility model is to provide a service that reflects the similarity and diversity of requirements so clients can benefit from this collective knowledge.

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