Fri, Mar 18, 2016

Urgency Grows to Prepare for MiFID II

Improving market conduct and combating market abuse remain key focus areas for regulators globally, as regulators push to have more comprehensive and accurate data about the markets for which they are responsible. Related to this, the level of fines imposed by regulators on firms for transaction reporting failures has escalated significantly recently. In the UK for example, the FCA imposed a £4.7m fine on a global investment bank in 2014 for failing to properly report over 29 million equity swap contracts-for-difference transactions; in 2015, another global investment bank was fined £13.2m for a number of transaction reporting failures.

The authorities will continue to invest in more advanced surveillance tools and more sophisticated techniques to help them identify and combat rogue trading. In Europe, regulators are markedly increasing the breadth and depth of data they will receive though the introduction of new transaction reporting regulations under the Markets in Financial Instruments Regulation (MiFIR) and the Markets in Financial Instruments Regulation Directive (MiFID II).

MiFID II will drive fundamental changes in the EU securities markets and it is expected that no business operating model will remain unaffected. The scope will be extended from the current MiFID I requirements to include all financial instruments traded on all Regulated Markets, Multilateral Trading Facilities (MTFs) or the new Organized Trading Facilities (OTFs). When taken together with the new obligation to trade a much wider range of instruments on regulated trading venues, MiFIR will require investment firms to report virtually all their OTC fx, commodity and interest rate derivative transactions, in addition to the current requirement to report trades in listed equities and fixed income.

Not only is the range of financial instruments for which reports have to be made widening significantly, the detail that each report must contain is also much greater than MiFID I. The number of fields to be completed in each report has more than doubled and will now contain information such as the personal details of the individual making the trading decision, identification of the specific algorithm responsible, whether a pre-trade transparency waiver was used and if the trade was a short sale.

The increased scope will also have a global reach impacting non-EEA investment firms operating within the EEA or branches of EEA investment firms located in non-EEA jurisdictions that trade in reportable financial instruments. For example, the US branch of a bank authorized in the UK or the London branch of a Japanese bank authorized in Japan would both have obligations under MiFID II when they trade in reportable financial instruments.

Regulators are also preparing for the increased scope and scale of transaction reporting under MiFID II. In the UK for instance, the FCA is building an entirely new transaction reporting system in order to be ready for MiFIR implementation.

Despite the potential deferral of the MiFIR/MiFID II effective to January 3, 2018, the scale and complexity of changes will make it a major challenge for firms. Not only will it be one of the most complex compliance exercises undertaken to date, it will also require firms to consider its strategic repercussions upon their business and operating models. Non-compliance with transaction reporting requirements and a lack of governance, systems and controls to mitigate transaction reporting failures will continue to be scrutinized closely by regulatory authorities and action will continue to be taken against firms which neglect their responsibilities.

Financial Services Compliance and Regulation

End-to-end governance, advisory and monitorship solutions to detect, mitigate, drive efficiencies and remediate operational, legal, compliance and regulatory risk.