The Markets in Financial Instruments Directive II is part of the European Union’s objective to create a fair/transparent EU market for securities. Mifid II, along with MiFiR, lays out obligations on financial firms across key operating aspects of the financial firms to improve transparency, create comprehensive audit trail, prevent market abuse and improve market integrity longer term for region’s financial markets and also create governance for third country to access EU investors.

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Key Obligations

The obligations are fairly onerous and will require funds to capture, record and analyze much more data than they have done ever before and across all the core processes of the fund (Operations, Accounting, Trading, Investor Relations, Risk and Compliance) as all are affected directly/indirectly.

This note focuses on specifically the most onerous obligation that of pre and post trade transparency reporting which under Mifid II now extends to all OTC trades in EU with a dynamic set of obligations (that can/will change over time) as per direction of Regulators on what is required to be reported real time (within 15 min) or on a T+1 basis. The regulators are clearly focused on lighting up the dark pools and move liquidity to MTFs, OTFs to create market transparency.

There are some exclusions to this obligation (stock loan trades, repos), post trade assignments/innovations as well as portfolio compression trades that are exempt but everything else is covered.

Key Challenges

We have been working closely with many clients on MiFID II readiness. Throughout this process we have come to recognize several challenges we focused on that our clients are encountering as they get up to speed on the new regulatory requirements.

First, we focused on our clients daily reporting obligations and found that there is a sensitivity around the timing for reporting. In addition, there are workflow challenges as listed transactions to be reported within three minutes from the execution.

We then focused on the challenges of reference data consistency. Since MiFID II fields include sensitive PFI Information of Traders, there needs to be comprehensive encryption of architecture as well as LEIs / Sls integration and cross referencing and a form of counterparty or trading venue details management.

Rules and Change management poised the challenge of waivers and deferrals rules needing to be configurable, exempt transactions management. In addition, we focused on the challenge of an operational workflow. This requires seamless integration and efficient post trade work flow across all systems with a need for an additional level of operational controls for approvals, especially for T + 1 Reporting. With this comes the need for a consolidated data that aggregates quotes and pricing from all respective venues.

Lastly comes the challenge of data quality and exception management since there is a need to have requisite validations before reporting to regulators. This call for complete transparency around acknowledgement and negative acknowledgement responses from regulators.

The Four Step Method

We have come up with a 4-step methodology to help clients navigate their transaction reporting challenges, which is fully supported in our IVP RAPTOR solution. This 4-step approach is agnostic of the final technology platform you choose but these are questions you will need to answer clearly to start your journey for Mifid II compliance. This 4-step methodology includes:

  1. Regulatory Construct
  2. Transaction Data Management and Governance
  3. Technology Platform Overhaul
  4. Operational Bandwidth and Controls

With the introduction and implementation of MiFID II quickly approaching, it is expected that asset managers will continue to face a variety of challenges ensuring they are compliant with the newest legislation of regulatory requirements. Firms will need to leverage not only the necessary knowledge but also the tools and technology to ultimately tackle their reporting needs.

Article by Gurvinder Singh, CEO of Indus Valley Partners