• Jeremy Taylor, Head of Business Consulting at GFT Group


• 09.12.2015 09:31 am

Jeremy Taylor, Head of Business Consulting, and John Downing, Enterprise Business Architect, GFT Group

For many, including ourselves, when the 1,285 pages of MiFID II landed on the doorstep it became apparent that this regulation was much bigger and more complex than the industry had ever imagined. At that point, no deviation in the delivery date - 3^rd January, 2017 - was expected, the banks had been told by the regulators that the date was fixed, and that there was no time to renegotiate any Level 1 or Level 2 changes.

Then, on the 10^th November this year Steven Maijoor, the Chairman of the European Securities and Markets Authority (ESMA) delivered a statement to the Economic and Monetary Affairs Committee (ECON) requesting a delay to the implementation date. He cited that the timing for stakeholders and regulators alike to implement the rules and build the necessary IT systems, was going to be “extremely tight”, and that there were already a few areas where the calendar was already unfeasible. This related to the fact that it will be well into 2016 before the complete text of the regulatory technical standards (RTS) will be stable and final. The building of some of the complex IT systems can only really start when these final details are firmly set, and most of the required IT systems will then need at least a year to be built, tested and commissioned.

What has resulted is a limbo period of uncertainty whilst ESMA and the European Parliament decide the best possible outcome for the European market. It would seem that the news is mostly greeted by the regulatory bodies and affected banking firms with equal sighs of understanding and relief. Any delay would give us all more time to do it right first time, with no compromise. All other legislation and regulation affected by such a change in implementation date would, by necessity, also need to be adjusted so as to bring a harmonised approach to such a delay.

How best to use whatever additional time is provided?

In no circumstances should we take our collective feet ‘off the pedal’. We have already firmly pushed the pedal to the floor to get our arms around this regulatory monster. We need to continue to read the small print in all of the 27 work streams (if available), and determine which instruments we will want to trade in and how and where these trades will be settled.

Given the exponential increase in instruments now within the mandate of MiFID II (collectively maybe 15,000,000 unique instruments), the increase in transparency (pre-and-post-trade, and transaction, reporting), and improved investor protection (professionals treated like retail clients in some respects), now is the time to determine how all of our operating models will change, across all asset classes.

The traditional vertical functional silos in our back and middle offices can and should be aligned horizontally to simplify the processing. The fluid nature of whether an instrument is ‘liquid’ or ‘illiquid’ will very likely cause major interruptions in their treatment in the back and middle office spheres. The need to reconcile trades, positions, profit & loss, and risk with a CCP, non-CCP, and regular OTC could in fact significantly increase the operational risk in settling and managing the events in the life of all derivative trades.

Any pause now will also allow valuable extra time to review new technologies, to see if they can provide any benefit in creating a MiFID II solution going forwards.

A fundamental change for all participants

An important point to note is that this request for an implementation delay has come from the regulators for the benefit of the regulators, who have accepted that the infrastructure they require to support the regulation is epic in its proportions, and will take longer to build if it is to meet its objectives. It is also vital in ensuring that data shared between National Competent Authorities (NCAs) ensures that limits and caps are correctly set.

This provides market participants with the best evidence yet that this piece of regulation will fundamentally change the way that firms interact with one another, the market and clients. Major business and operating model decisions need to be made quickly, and feasibility studies completed on how best to adapt to the new rules. There are choices to be made on whether to become Multilateral Trading Facilities (MTF), Organised Trading Facilities (OTF), Systemic Internalisers (SI), or some combination of all three. This implies material change to the way trades are captured and piped to downstream systems for processing and reporting.

All in all, despite the appearance of more time being made available, it is vital that firms conduct a full impact study now in order to give themselves sufficient time to build and adapt their business and system architectures, ahead of the suspected new deadline.