MiFID, the Markets in Financial Instruments Directive, has been operational across the European Union since 2007, but updates to the directive earlier this year have dramatically changed how financial firms work and communicate.
MiFID II, an updated version of the legislation, came into force in January this year. The latest framework aims to strengthen investor protection and improve the transparency of financial markets, to make them more efficient and resilient. With around 30,000 pages of rules, MiFID II was lauded as the biggest shake-up to European markets in a decade, featuring new requirements on everything from market structure to product governance.
The impact and aims of MiFID II
Since the regulation covers almost all aspects of trading across the EU, its impact has been widespread across the industry. For many, MiFID II outsourcing – particularly where software or systems are concerned – has been a necessary path for compliance.
Many firms are changing the way they communicate with clients and counterparts, while trading desks at banks have been forced to redefine how they do business. New rules around investment research now require separately funded asset managers to pay for analysts’ research and advice, in an effort to reduce the possibility of a conflict of interest.
These changes represent a major shift from the day-to-day practices of investment firms, particularly where research is concerned – previously, research would be included in a bundle of services, with no specific charge.
MiFID II also aims to tackle market abuse, which remains a major problem across the industry: “unusual trading” occurred before one in five takeover announcements in 2017, the highest level since the aftermath of the financial crisis in 2010. New reporting requirements under MiFID II will increase the amount of information available, helping regulators like the Financial Conduct Authority (FCA) to detect incidents of abuse.
What is required under MiFID II?
To be compliant with MiFID II, firms will need to spend time ensuring that their systems, organisational processes and tools meet strict new standards. Before considering whether MiFID II outsourcing is right for your company, it’s important to understand the new requirements and how they are likely to affect you.
The use of communication channels
MiFID II requires all communications that relate to the “reception, transmission and execution of client orders” to be recorded. This includes any communications that were “intended” to result in a transaction, regardless of whether the transaction was actually completed.
Under the new regulations, investment firms will need to take adequate steps to record relevant telephone conversations and electronic communications for their records. Although other methods of communication aren’t technically off-limits in MiFID II, the regulation states that any conversations will need to be made in a “durable” medium.
Face-to-face conversations may need to be recorded using either written minutes or notes, and they will be considered equivalent to orders received by telephone. Firms are also required to “take all reasonable steps” to prevent employees or (if you’re looking at MiFID II outsourcing) contractors from making, sending or receiving conversations on privately owned equipment, which can’t be recorded or copied.
Data storage under MiFID II
Before any conversations are recorded, firms will need to notify new and existing clients that future discussions around transactions may be recorded. These recordings should then be provided to the client if requested.
Otherwise, all communications regarding transactions will need to be stored for a minimum of five years – a substantial increase from the current period of six months. Since the data will be of a sensitive nature, it’s crucial that it’s both secure and easily accessible, should a regulator request something specific. Firms that use siloed systems or legacy technologies that may be inflexible with the new regulations should consider MiFID II outsourcing, to ensure their reporting remains accurate.
The prevention of market abuse
The latest updates in MiFID II significantly expand on the regulations around transaction reporting, as were initially set out in MiFID I. While firms were previously expected to guard against abuse in the marketplace, they are now also required to encourage fair and honest transactions, and promote market integrity.
Transaction reporting is essentially used to detect and prevent market abuse. These reports include information on types of financial instruments, when and how they’re traded and by whom. The information included in the report isn’t made public, and is instead used by the Financial Conduct Authority to monitor transactions across the marketplace. This is expected to be key in curbing market abuse, giving regulators the ability to track orders by trader or client in an estimated £50m orders per day.
Is MiFID II outsourcing worth it?
While MiFID II is set to have a positive impact on the market and investor confidence, it puts huge pressure on small and medium sized firms. The scope of requirements around reporting has increased substantially, and firms must now consider whether their infrastructure, administrative systems and methods of communication are up to scratch.
Educating your employees in-house can save a lot of time with certain aspects of the directive, and reduce the amount of MiFID II outsourcing you might need to do otherwise. By keeping all client communications to one or two channels (for example, email and telephone), you can simplify your process of data collection and ensure you’re not missing an important recording should the regulator request it. To be successful with this, employees will need to break the habit of using social media or personal phones to converse with clients.
When it comes to your software and systems, however, MiFID II outsourcing is the easiest route to take. Not only does outsourcing free up time, it means firms can focus on training up employees and creating income in a rapidly changing market.
There’s also the obvious benefit of cost saving that comes with using technology specifically designed for MiFID II compliance. With transaction reporting in particular, the number of fields have significantly increased and traditional databases are likely to struggle to process the data, especially if the information doesn’t fit into a required field. The data will then be rejected, resulting in inaccuracies – and it’s likely that an employee would have to manually fix the problem. With software used in MiFID II outsourcing, data can be filed and processed as-is, creating a quicker route to compliance.
Achieve data compliance with eflow
MiFID II’s strict regulations around data reporting and storage make it clear that the traditional processes of financial firms need to change. Opting for MiFID II outsourcing can positively impact both the efficiency of a business and its bottom line, so it’s important to choose software that will simplify your work – not complicate it.
The eflow solution is data storage made easy. Our product stores data in a WORM (write once, read many) device, meaning it can’t be modified once it’s written and you don’t have to worry about it being tampered with. With eflow, the search and retrieval of data is flexible and instant, making conforming to tight regulatory time frames effortless.
To find out more about eflow and how MiFID II might affect your firm, contact eflow Global today.