Financials beware: MiFID-II & MiFIR is coming, and it’s coming fast! It’s complex, highly controversial and it will hurt the unprepared. The new directive for financial markets in all European Economic Area member states will come into force on January 1st, 2017.
The Markets in Financial Instruments Directive (MiFID), which we now call MiFID-I, was announced during Frits Bolkestein’s term as European Commissioner for Internal Market and Services (1999-2004) and came into force on January 1st, 2007, on the eve of the crisis that hit financial markets worldwide. Its successor, MiFID-II & MiFIR, aims to further harmonize European financial markets and provides more transparency protection for consumers. The legislation is fuelled by lessons learned during the crisis. System risks, technical developments and trading facilities previously untouched by MiFID are all part of extensive new legislation with a much wider scope.
Controversial? In a broad sense, most parties touched by MiFID-II & MiFIR understand the necessity for it. MiFID II & MiFIR apply to the majority of financial products such as equities, bonds, OTC derivatives and structured products. It is designed to be relevant for investment firms, asset managers as well as for regulated markets, central counterparties (CCPs) and data reporting services providers. Some actions will have little to no impact at all on their businesses or can be implemented quickly. Other measures, however, will have a huge impact.
Take, for example, transaction data. The European Authority for Financial Markets (ESMA) states that all financial firms need to report transactions in real time. APA (Approved publication arrangement) will be introduced for the publication of post-trade transparency data. The end consumer should be informed and has a right to access as much information as possible. In order to protect the consumer further, MiFID-II & MiFIR determines the maximum costs of post-trade information and this will affect parties that provide trade data. Post-trade information with a delay of 15 minutes or more will need to be available free of charge.
How close are we to implementation? Very. The effects of MiFID-II are grossly underestimated by financial services. January 3rd, 2017, is the proposed start date. A problem that many organisations face, however, is that there is still no final document that describes technical impact. ESMA will publish this document in September, 2015. Until then you have to 'Sherlock Holmes' yourself through the preliminary documents in order to interpret the consequences and prepare for them. Companies that are affected by MiFID-II should have already mapped out the impact of it on their organisations as the expectation is that it could take up to 18 months in order to be fully compliant.
Further thoughts and actions
Mapping out the impact of MiFID-II & MiFIR, in anticipation of the final concept, should be the first action any financial organisation makes. Some points to take into consideration include:
- Investments are necessary (and, in many cases, even unavoidable). We are talking about investments in IT systems and making reserves in your budget that are obligatory by the legislative changes. Some companies are looking at a complete overhaul of their strategy – e.g. if business is built on distributing relayed transaction data, that business model is essentially eliminated by MiFID-II.
- MiFID-II & MiFIR describes, to a great extent, actions for collecting and storing of pre- and post-trade information. This has big impact on trading platforms and trading firms. Not only public, but also internal trading facilities and exchanges must be able to disclose the process to, and properties of, transactions. Information must be kept on file with an external party for seven years.
- There will be huge demand for external services to collect, store, report and disclose trade information. This is also why we (at VI Company) are preparing to offer market participants an independent service, a so-called Approved publication arrangement (APA).
- Changes in legislation and compliance pressure are pretty much a given for financial institutions and services. Nevertheless, the impact of MiFID-II & MiFIR is unprecedented. It will create a shock, and a much bigger one than many expect. And let's not forget: sanctions are severe, with penalties of up to 10% of annual turnover or at least €5 million, and at least twice the benefit derived (where this can be determined). This will raise the bar considerably on needed knowledge, experience, reputation and commitment for all companies and professionals involved.