The European Union’s (EU) Markets in Financial Instruments Directive (MiFID) II is expected to provide some of the biggest data compliance challenges in recent times when it goes live in January 2018. It also offers an opportunity for firms to rethink their reporting infrastructures to create a more efficient, cost-effective and sustainable approach to regulatory reporting across multiple regimes.
Yet many firms feel their supporting systems may not be adequate enough to meet the regulation’s extensive data reporting and validation requirements. A survey conducted by Sapient Global Markets, which included over 300 industry participants, found that 50% of firms either cited a lack of internal data governance or poor data quality as the biggest challenge they face in preparing for MiFID II compliance, while a further 17% said poor technology and manual processes are their main hurdles.
Further, nearly 40% of firms said they currently spend more than US$40m on regulatory reporting globally, 11% that they spend anywhere from US$10m to US$30m while the other 50% allocate US$5m to US$10m. Despite these sizeable investments, they are still grappling with data management challenges and inefficient trade reporting processes and governance.
Tight timelines for both Dodd Frank and the European Market Infrastructure Regulation (EMIR) have resulted in many shortcuts and reduced features – particularly related to data mapping, data ingestion and operational management information reports – often with more than one reporting system servicing different silos of the bank.
Many banks will spend as much to meet forthcoming regulations as they did to get to where they are now. In all likelihood, they will realise little to zero savings due to the lack of extensibility and flexibility in their current reporting solutions.
However, the same survey also found that the majority of firms (52%) still plan on leveraging their existing reporting infrastructure to comply with MiFID II reporting requirements. That means despite recognising their own deficiencies, they still plan to utilise those same support systems. This will only set organisations back.
Often firms are burned by creating tactical reporting solutions that can limit functionality and command attention throughout the organisation. A significant amount of time and money is then dedicated to manual improvements and updates in order to comply with new specifications and regulations. Firms need to assess the high cost of ownership over a long-term period rather than building a short-term solution and worrying about the technological bugs later.
Overcoming project hurdles
A well-established challenge for regulatory compliance projects is the lack of time to look for long-term or strategic solutions that unite the front and back office to set up the appropriate compliance and data governance structures. Instead, many feel pressured to find a quick-fix, short-term solution that will reduce regulatory risk. The findings from the survey seem to point to this being the case once again. Without focusing on the bigger picture and getting buy-in for real change, the same problems and mistakes made under previous regimes will be repeated.
The other side of the challenge is the lack of internal expertise or upfront analysis budget, which often causes firms to forgo seeking more efficient solutions. Often this means missing the opportunity to identify and evaluate off-the-shelf tools, which are designed to handle the task at hand. That creates an environment of constant flux, where manpower is pulled in different directions in order to maintain tactical systems that struggle to keep pace with the depth and breadth that MiFID II requires – let alone refinements to other regulations, such as impending Level 3 changes to EMIR.
The sheer scope of MiFID II is going to require greater granularity on source and reference data. For the sake of comparison, the data fields required under EMIR included 20 fields whereas MiFID II is expected to have roughly 65 to 85 fields. Apart from transaction reporting, there are new requirements to report pre trade information i.e. order/quotes data, which may not be always be available in a structured format. There are other complex requirements on generation of best execution reports and reporting of commodity positions. There will also be certain data that treasury will have to formularise to new source systems requiring more formal enterprise systems within the organisation.
In addition, with so many third parties involved (the European Securities and Markets Authority (ESMA), National Crime Agencies (NCAs), trade repositories, approved publication arrangements (APAs) and approved reporting mechanisms (ARMs)) an enterprise compliance model is crucial for standardisation between all parties to ensure proper transparency, effective communication and efficient data exchange.
A single messaging delivery platform can help streamline communication and also provide a better system to respond to reconciliation requests. Post-delivery is where the bulk of the work is conducted on validating and confirming data. A platform providing a consolidated dashboard of joint case management and control room functions can improve treasury’s internal functionality from a transparency and audit perspective.
Choosing an appropriate solution
As regulators seek more transparency around the parties involved pre- and post-trade, use more data identifiers, conduct peer reporting comparisons and look for efficient reconciliation, the need for a comprehensive rethink of how firms are managing data, operational systems, external providers and costs is clear.
Today’s requirements are in a constant state of change and new rules are continuing to shift the entire trade and transaction reporting landscape. Your technology cannot simply be IT-dependent.
The new reporting landscape requires a regulatory solution that meets the following requirements:
- Compliance governance: The system must trace back the lineage of data to validate any past or present transactions.
- Flexibility: The system must incorporate the request of multiple regulatory bodies and have the ability to adjust on the fly to normalize data in the format requested by any of the various regulatory bodies.
- Extendibility: The platform should extend beyond just one regulation, such as MiFID II, to meet the requirements of other forthcoming regulations or amendments to existing regimes.
- Connectivity: Ability to connect multiple end points for different types of reporting. i.e. pre, post and transaction, reference data, commodities positions etc. It must also connect to third party data providers for International Securities Identification Numbers (ISINs) and securities identifiers.
- Reconciliation: The system must demonstrate the complete lifecycle of events and transactions to easily retrieve, confirm and report data as needed.
Choosing how to deploy internal resources and external service providers in an increasingly complex environment is a large undertaking. However, an important factor for treasurers to keep in mind as they migrate over to a new regulatory strategy is the similarities between past requirements and new demands.
The ability to observe and learn from what did and didn’t work under previous regimes, particularly for the operating model and control framework that has facilitated your reporting up until now, is a vital component to improve treasury’s compliance and data governance processes for MiFID II and other upcoming regulations, while also keeping costs low.
The 12 month delay to MiFIDII doesn’t make the complexity of compliance any easier. Indeed, firms will likely be subject to heightened scrutiny given they’ve had more time to prepare and there is likely to be less tolerance for failures to complete change projects, prepare documentation or report accurately within the deadlines.
However, it’s not too late for firms to start devising a strategy for MiFID II that can give them the flexibility to stay both cost-effective and competitive while still meeting the current regulatory burden. A strategic move to a holistic and user-friendly solution with the capacity to adjust existing and expand to new regulation will yield savings in both on going operational team overhead and technology footprint.
- Read other recent articles on MiFID II from GTNews here.
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