What’s Next for Financial Services and MiFID II

Blog entry

By: Jay Patani, Tech Evangelist at ITRS

In Hollywood, with every movie that hits the headlines its sequel is right around the corner. When the credits roll, it no longer marks the end of a film, but the next step in a long and lengthy franchise. The same applies in the world of financial services. Just as movies never finish, neither does the extensive regulation of Markets in Financial Instruments Directive II (MiFID II).

Financial services firms may be tempted to think the mad dash for compliance is over, but it’s not. The January 3rd MiFID II deadline may have been and gone, but the rate of regulatory change is unlikely to slow. Like an actor filming the first instalment of a trilogy, compliance teams have a long way to go in 2018. Firms will be expected to view compliance as an evolving state and remain innovative as the regulation beds in. They will also need to leverage technology to meet Financial Conduct Authority (FCA) requirements, improve on processes and go beyond initial compliance as new technologies become available.

Best execution

Investment managers under MiFID II must approach orders for their customers by ensuring the best execution possible, and then prove it. This has largely remained a box ticking exercise for many firms, however this year firms seeing regulatory change as an opportunity can build on their processes to boost their business.

For example, the next step for firms will be how they approach the huge volumes of new data available to build into best execution evaluations of various venues and counterparties. MiFID II RTS 27 requires venues to make more data available on the quality of their executions, giving firms with better analytics capabilities the opportunity to compare execution in a more granular way. This means businesses that invest in this comprehensive analysis will be the ones successfully leveraging MiFID II to enhance their trading activities.

RTS 28 requires firms to disclose their top five destinations for order flow, in order to highlight firms that have directed orders to venues for the wrong reasons. RTS 28 also asks investment firms to provide information on how they have used ‘data or tools relating to the quality of execution, including any data published under RTS 27’. It is therefore not only the quantity of data that matters, but also the way in which it is analysed.

Market abuse

This year, financial services firms will also need to take into account the FCA’s increased scrutiny around market abuse. They should aim to step up their level of insight when it comes to their own internal market abuse surveillance. Staying innovative will keep firms on the front foot with any suspicious activity and IT professionals can support this by using real-time data monitoring to detect abnormalities, such as an unusually high level of activity, before the regulator does.

Trade reporting

Trade reporting is also subject to strict SLAs under MiFID II. The IT support team is often responsible for maintaining systems and processes around reporting, and when things do go wrong, it will need to understand the impact of a failure to comply on the business. Technology can analyse this, allowing firms to establish their exposure and identify how to best rectify problems.

Three months post implementation day and compliance for compliance sake is no longer enough. As the red carpet rolls out, again, it will be the firms who view MiFID II as an opportunity rather than a burden that will reap the biggest rewards. Instead of playing catch up, firms should start to proactively collect more data, remove data siloes and become more sophisticated in how they use the data.