|
|
“Expect some panic buying and a lot of engagement with consulting firms ahead of January 2017,” said Virginie O’ Shea, senior analyst at Aite and author of the report. “The regulatory community appears to be listening and reacting to industry input on the fields and formats for reporting, so any firms that wish to influence the new regime should engage as soon as possible.”
Unfortunately, MiFIR is being finalised at the same time as a host of other European regulations affecting financial services, not least of which are EMIR, SFTR and REMIT. Aite notes that although the EC is attempting to coordinate all of these and ensure that they are harmonised, in practice that goal may be difficult to achieve given the limited resources available to ESMA and the fact that each regulation is being drafted by different working groups. That could lead to disparities and in the worst case, it may mean that financial institutions will need to report to both a trade repository and an automated reporting mechanism, in the short term.
The issue of resources will also be a problem when it comes to the EC’s ability to police the vast quantities of data it will be collecting under the new rules. Very few companies have been caught out submitting poor quality reports and data under MiFID one – and that covers a far smaller set of assets than MiFID II and MiFIR. As a result, it’s likely that firms will be able to get away with submitting poor-quality data for “some time to come”, simply due to the sheer volume of reports.
The penalty for those firms that do get caught may be severe, as the regulator will want to set an example – and the UK FCA is expected to make the first move, given its record. Global businesses will also need to be aware of potential conflicts between European regulations and US securities regulation under Dodd-Frank, some of which has an extra-territorial impact. As a result, the best way to counter the threat posed by the new regulation and the potential fines for non-compliance may be to focus on improving bank reporting processes, by introducing common taxonomies across business lines and introducing data stewardship programs to ensure the data is correct at the point of entry. Aite warns that this kind of data governance and data management will require investment, but notes that the regulatory impetus behind it is compelling.
The regulation states that trading algos must also be tagged by a ‘unique, consistent, and persistent’ identifier that relates to the algorithm’s unique code or strategy. When a person rather than an algo makes the investment decision, firms must identify the trader who made the decision to acquire, dispose of, or modify the financial instrument. When a formal committee makes the decision, firms must provide a separate trader identifier for each committee, starting with the prefix “COM.”
“The addition of these new fields will cause a headache for most firms because of the challenge of adding and supporting new identifiers—essentially creating new transactional reference data—at the point of execution,” said O’ Shea. “Front-office systems must therefore be altered along with all downstream reference databases to continually capture and maintain this information. Though this may be beneficial for firms’ internal trader surveillance in the longer term (though how useful this will be is questionable because it stops short of identifying individuals), the short term will entail potentially significant system and process changes.”