Financial Regulation – A Month of MiFID II

In the past decade an unequalled amount of regulatory reform has taken place internationally across the financial services industry; a journey that has not been for the faint-hearted or those lacking in stamina and endurance! All of us involved in this marketplace; clients, institutions and service providers; know intimately that these reforms have been aimed at reducing systemic risk in the markets by attempting to make them safer for consumers. We also know that the actual breadth and depth of the regulations (increasing tax transparency, strengthening capital requirements, increasing reporting and even restructuring banks) have been multifaceted and, in many cases, have overlapped both financial products and regional (legal) jurisdictions.

It seems almost unthinkable that nearly ten years ago, it was the 2008 financial crisis that impelled governments and regulatory bodies across the world to design and initiate a slew of reforms created to provide greater transparency across the universe of global transactions. This with the aim of reducing risk and constructing financial systems that are inherently more stable and better regulated. Different capital and bank structure rules have been devised; with the intention of creating and underpinning global markets to be more resilient to possible future crunches, therefore inherently affording greater consumer protection.

An exhaustive brain-dump of directives the market has had to deal with includes the following:

  • Basel III
  • BCBS Margin rules
  • Canada Derivatives Trade Reporting
  • Central Securities Depositories Regulation and T+2
  • CRD IV
  • CRS
  • Dodd-Frank Act
  • Dodd-Frank Volcker Rule
  • EMIR
  • EU Banking Reform
  • Hong Kong Monetary Authority (HKMA) market reform
  • MAD and MAR
  • MiFID II
  • PRIIPs
  • UKCD and OT Regulations

Financial institutions are largely committed to implementing these regulations in their practices, whilst also raising the levels of awareness of the reforms among their global client base. We have seen and tracked change arising in four key areas:

  1. Market structure
  2. Bank structure
  3. Tax transparency
  4. Capital and liquidity

In the context of Market Structure and of interest now, particularly towards the end of January 2018, is the status of the vast and far-reaching Markets in Financial Instruments Directive (MiFID II) regulation. The long-awaited/delayed entry of MiFID II which came into force on 3 January this year, is an historic regulatory juncture in the European and global financial markets; bringing into practice the biggest single market reform in over a decade, especially with regards to the lessons learnt from the financial crisis of 2008.

The reach of the rules touches almost every part of the operating process for those involved in buying and selling shares from changing how analysts research is paid for, to demanding the provision of timely and detailed information about trades.

Evidencing this impact, the so-called ‘framework’ of MiFID II encompasses:

  • Client classification
  • Documentation and data
  • The manufacture and distribution of products
  • Permitted inducements
  • Research unbundling
  • Suitability and appropriateness
  • Costs and charges
  • Market structure
  • Algorithmic and electronic trading
  • Best execution
  • Transaction reporting

Given the scope, it should not have come as a surprise that, on the day when MiFID II came into force on the 3rd of January, in reality only some of it did. Recent market commentary from Bloomberg notes that, the rest will show up in bits and pieces over a year or more, with some parts possibly needing to be organised differently after firms, lawmakers and regulators continue to struggle with the minutiae of at least ten further major deadlines in 2018 alone.

Ernst and Young note that, as such, while MiFID II has been a huge body of work for businesses, it is not over yet. It is probably more accurate to consider the 3rd of January 2018 not as the finishing line, but rather as the end of a much-protracted beginning!

This reality is, beyond doubt, the biggest challenge for firms implementing RegTech like Client Lifecycle Management platforms (CLM) in support of / or as enablers for ongoing compliance with multiple large regulations that take years to implement and then start to change almost immediately. As we at iMeta have noted before, an enterprise CLM platform needs to be a modular case management workflow platform that, combined with a rules engine, is able to deliver robust regulatory compliance and active operational process management. As clearly seen above, this is a complex space where the need to streamline client on-boarding, account opening and client data management activities is coupled with a requirement for automated enforcement of compliance across both standard client due diligence processes (KYC/AML), and the many contemporary industry tax and trading regulations, across product lines, business silos and geographical jurisdictions. At iMeta, our thinking, market awareness, product set and ability in this space remains up to date and front-and-centre in terms of required capability for Financial Institutions and other governed firms that have yet to completely put their arms around these challenges; and that is surely most of them!