MiFID II Goes Live: What Changes?

Capital Markets Traders on Phones at their Screens

When the hashtag for a set of financial regulations is trending on Twitter, it’s safe to assume something significant is happening.

MiFID II Goes Live

On January 2nd, across The City of London and other European capitals, IT and compliance professionals dragged themselves back into work, uncomfortably soon after the New Year celebrations, to implement the big MiFID II go-live that happened on the 3rd. In contrast to events such as Y2K, this wasn’t a case of whether systems were up and available for business, the success criteria were much more subtle.

Compliance Predictions

I last posted about MiFID II in 2016, just before the postponement of the original 2017 go-live date. I talked about the trend of regulations towards real-time monitoring; I didn’t use the specific word “surveillance” that has become the all-encompassing term since. The primary drive with surveillance has been to deliver discrete aspects of the solution using off-the-shelf products with an eye to integrating them in strategically holistic approaches.
I also talked about the need for trading communications technology to have compliance built-in rather than bolted-on. The hope was that MiFID II would be the catalyst towards more open standards in trader UC and the compliance integration I have advocated for so long.

The State of Play in Compliance

As has been reflected in social media, the level of compliance to MiFID II is varied. The acid test of what regulators deem to be acceptable will come when an investigation takes place and potential fines are levied; this is the nuanced subtlety of compliance.
JP Reis have always been part of the solution to compliance challenges, having carried out audit and remediation projects against various regulatory frameworks across the globe. Over the past few years, we have worked with most of the world’s top 20 investment banks. In some cases, there has been a pure compliance focus, in others, it has been about strategic design to place all forms of structured and unstructured data into common infrastructures with normalised metadata. Part of the challenge is ongoing litigation, particularly around the well-publicised rate fixing events. We continue to be deeply involved in the retrieval and eDiscovery of voice recordings and metadata from legacy systems. These systems are proprietary and closed in nature, they do not lend themselves to normalised data repositories, but they are essential to these ongoing investigations.

The Compliance Solution: Best Execution Evaluation and Measurement. 

JP Reis is staunchly independent of technology vendors and is not a reseller. This gives us the ability to work with any relevant vendor to design technologies and methodologies that enable surveillance across multiple data types. We have continued to collaborate with several vendors, experts and clients to create a holistic compliance solution far in advance of any ‘plug in and play’ offering in the industry. As I said in 2016#, the financial institutions who invest to get ahead of the compliance curve will achieve competitive advantage.
If forensic analysis for market abuse starts with large sets of unstructured data types e.g. voice recordings, the success rate is so low that it generates negligible value with current technologies. We recommend that the surveillance process focuses initially on the data that is most easy to interrogate i.e. the structured trading data. Not that I’m suggesting this is simple; we have been working with a leading quantitative analyst to develop a methodology that compares an individual client’s trading data with whole market trade information to spot potential abuses such as front-running and spoofing. This method is also applicable to best execution data.  If the normalised data repositories that we have designed are adopted, indications of anomalous activity from the trading data enable us to examine precise sets of short period, unstructured information. By focusing in this way, the system becomes extremely effective and relevant evidence can be quickly identified. Ultimately, these systems will be optimised with machine learning. Regulatory compliance considerations need to form part of the procurement process for all trading technology.

MiFID II for Smaller Firms

A separate challenge of MiFID II is for smaller financial institutions that have not previously been regulated and so have no in-house compliance skills. While a new breed of compliance and surveillance officers is emerging, it can never be economically efficient to develop and maintain effective technologies internally. These institutions will need to rely on off-the-shelf products and their larger trading partners and service providers in these early days. As the surveillance industry matures, effective solutions will be delivered in Compliance as a Service (CaaS) models.

MiFID II January 2018

Now, on 5th January 2018, it feels like not much has changed. Many of the column inches from the likes of The Financial Times or Bloomberg suggest that not enough has happened in preparation and many companies ‘probably’ remain non-compliant. The challenge for all trading companies is to eradicate that uncertainty. In the past, we have seen vast sums of money being spent on systems that were intended to avoid fines for non-compliance but failed in that regard. I have long argued that compliance and litigation protection are not currently the same thing.
For JP Reis the post go-live situation won’t change much, we will continue to support the clients who have put their faith in us to make the best strategic decisions. It’s evolution not revolution but both of those scenarios have winners and losers. MiFID II is not a moment in time like Y2K, it is an ongoing process that will evolve continuously.

#And for many years before that.

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