MiFID II and investment firms’ challenges in terms of reporting requirements

Published on August 20, 2019 by Nitin Sonawane

The Markets in Financial Instruments Directive (MiFID) is a regulation that increases transparency in the European Union's (EU’s) financial markets and standardizes the regulatory disclosure requirements in those markets.

It was introduced in 2007 and implemented new measures, such as pre- and post-trade transparency requirements, and set standards of conduct for financial firms.

Key goals of MiFID:

1. To set investor-protection rules for the European Economic Area. The obligation to drive the best possible result for the client, information disclosure requirements, and client-specific rules regarding the suitability and appropriateness of financial products improve investor protection.

2. One of the primary goals of MiFID is to put in place a common regulatory framework for all EU members.

MiFID defines the fiduciary duties of financial institutions by establishing the general obligation to place clients’ interests ahead of the firm’s interests. MiFID has a defined scope that focuses primarily on over-the-counter (OTC) transactions.

MiFID applies to all firms in the European Economic Area (EEA), which comprises the 28 EU states and Iceland, Norway, and Liechtenstein, and is concerned primarily with the classification of clients, conflicts of interest, and handling of clients’ money, assets and orders, including ensuring pre-trade and post-trade transparency and best execution.

MiFID II, the updated version, came into force on January 3, 2018, with new directives announced to improve transparency in Europe’s capital markets. The regulator introduced the concept of trading obligations for various instruments, such as fixed income, foreign exchange, currency derivatives, and commodity derivatives. Financial institutions that transact in these instruments are required to meet the same data standards MiFID has imposed on equity markets.

MiFID establishes minimum standards of pre- and post-trade transparency for financial instruments traded on regulated markets’ order-matching systems.

Orders are executed using front-office dealing applications, which aid decisions on how trades are to be executed for different clients and financial instruments.

Financial institutions need new technological solutions that would enable them to capture and analyze transaction data related to trade lifecycles. MiFID’s requirements have presented new challenges for organizations dealing in financial instruments in terms of quoting the best price.

Challenges companies are facing to meet the new requirements for reporting and data publishing prescribed by MiFID II

• Generating the information required for regulatory reporting, backed by proper research

• Creating compliance repositories and formulae/logic that can be reused for generating reports

• Creating an efficient mechanism for transaction reporting, which sends information about all trades executed in regulated markets

• Database requirements, i.e., they should not be prone to disruption, but designed to adapt to new paradigm shifts and ensure protection

• Publishing pre- and post-trade data, which requires financial institutions to find new applications to ensure compliance, without resistance from stakeholders

How financial institutions overcome these challenges:

• Organizations have established new systems that have provided them with new research entitlements to produce documentation that can be shared with internal and external stakeholders, including regulators

• To ensure pre- and post-trade transparency, organizations have focused on publishing real-time data. With the adoption of new systems and standardized analytics, they have been able to improve liquidity and assess trade venues for diligent trade execution

• The requirement to capture information, as per the new rules governing order-management systems, is being met through new, improved order-handling systems, including decision-maker identification, time stamping, and voice-based communication

• Requirements relating to transaction reporting requirements are met comprehensively by using controls and procedures to avoid errors by applying rules, and reporting waiver determination engines (such as Bloomberg’s Trade Order Management Solutions (TOMS) and Sell-Side Execution and Order Management Solutions (SSEOMS) to prevent over-reporting.

Conclusion:

MiFID II directives are issued to EU and non-EU firms, and additional instruments are being brought under their purview. Investor protection is at the heart of the new reporting requirements, which focus on electronic trading, transparency and transaction reporting, and product protection. Investment firms have had to adopt new technology to meet the new reporting requirements, and major IT firms have come up with technological solutions to meet the challenges posed by the new directives.

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Sources:

• https://www.investopedia.com/terms/m/mifid.asp

• https://www.bloomberg.com

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