Preparing for MiFID II: Here’s What’s Working for Banks & Investment Firms
In January 2018, the European Union will officially enact MiFID II, a new set of regulations meant to oversee the structure of the securities market. Created in response to issues identified following the 2008 financial crisis, these new standards aim to strengthen investor protection, reduce systemic risks and increase the efficiency of the financial markets. Aspects of this enhance the know your customer processes, create more transparency into the instruments being traded, and introduce position limits on the aggregate amount people can hold or be exposed to for certain types of commodity derivatives.
The original Markets in Financial Instruments Directive (MiFID) has served as the “cornerstone” of the European Union’s financial markets regulation since it was created in 2007 as an attempt to better protect investors by implementing standards for those who advise them and/or manage their portfolios. Now, post-financial crisis, there is a need to tighten control of trade transparency and ensure complex, high-risk financial instruments are only being traded by customers who understand the risk they’re exposed to.
MiFID II will replace MiFID, implementing more throttles on the market. Being able to show what an investor’s exposure is will help to ensure the market is not vulnerable to the same kinds of surprises that occurred nine years ago. Much of MiFID II will enact tighter regulations on trade transaction reporting in areas like reporting the price of a trade at the synchronized time, down to the second, that a trade was executed. While these requirements will certainly have a weighted impact, from a KYC regulatory standpoint banks and financial organizations have focused on the technology that will help properly identify the entities they enter into trades with.
Thus far, we’ve seen a positive trend in banks and investment firms taking the necessary steps to prepare for MiFID II.
LEIs required under MiFID II
During the last financial crisis, many investment firms struggled to answer simple questions quantifying exposure to a sector, entity or type of instrument. In many cases it took weeks and a team of analysts to answer these questions because there are many complex derivatives and there wasn’t any real transparency to allow aggregation of those exposures.
Now with MiFID II, required legal entity identifiers (LEIs) will create a clearer picture of what trade risk looks like in shape and size. All trades will have to be reported with LEIs, or reference codes that serve as unique identifiers for any legal entity that enters into a financial transaction, for each party involved in the trade. The new requirement is designed to ensure proper categorization of market participants and the instruments traded, in order to better outline what an investor’s risk looks like. Under MiFID II, a trade will not be made if there is not an LEI for each party involved.
Data solutions technology is key for financial institutions under MiFID II
The need to have an LEI on every entity, along with a more detailed understanding of the Client to determine disclosures, position limits and other factors is something many banks and investment firms have already been taking steps to prepare for and asking for help with. At Opus, we’ve spent a lot of time focusing on making data consumption easier and faster for organizations to be in compliance with MiFID II.
Being able to access data with speed and ease will be critical to trades and transactions going smoothly under MiFID II regulations. Traditionally, data solutions have been accessed in batch mechanisms—large files that go out overnight via FTP-type processes. Increasingly, we’ve been developing the next generation of application program interfaces (APIs) to access content in real time and search in an easy, intuitive way.
Our Resolve solution is an API mechanism used to access entity reference data. Previously, trades could be reported with a bic code or other suitable entry identifier. Under MiFID II, all trades will have to be reported to regulators, who will have to use an LEI for each party involved in the trade.
Our Concordance service is a data solution that allows firms to find LEIs and append the pre-matched content that helps describe a trade participant and accelerate the process. Firms submit a list of trading parties, customers, and counterparties, which Opus reviews, standardizes, matches, de-duplicates, and enriches with licensed content.
The Alacra Authority File and our wider LEI database contain a pre-matched cross reference of all entity identifiers. That allows them to automatically match with 100 percent certainty.
MiFID II and the move towards regulatory transparency
Across the market and in various data venues, much of the focus and concern surrounds being ready for MiFID II. So much so that a lot of firms are in an advanced state of readiness. Much of this preparation is due to increased transparency into the regulatory process—regulators are trying to do a better job of listening to the market and taking a metered approach so compliance surprises don’t occur.
Like other regulation changes that have happened over the past few years, the run up to MiFID II should see very little fallout once it’s in place. We’ve seen a trend towards much more open dialogue between regulators and the industry before regulations are finalized. In the U.S., for example, the Treasury’s Financial Crimes Enforcement Network (FinCEN) generally broadcasts proposals in advance and accepts feedback before rules are final. In Europe, the Fourth Money Laundering Directive (MLD4) is underway, with regulators already discussing MLD5.
While the pace has changed and regulations are certainly happening at a more rapid rate, the transparency into the process is much better than it was a few years ago. MiFID II will be effective, but, more importantly, the industry has put a lot of focus into making sure companies are ready.