The last financial crisis demonstrated the transparency shortcomings of the financial markets and shook investor confidence. In response to this crisis of confidence, on 3 July 2014, the European Union enacted a new version of the Financial Markets Directive (Markets in Financial Instruments Directive – MiFID II) together with a Financial Markets Regulation (Markets in Financial Instruments Regulation – MiFIR). The new requirements, which will be applicable starting January 2018, will pose huge challenges for banks and financial services providers.
An overview of the main requirements:
Banks and financial services providers must expect extensive new rules in the area of investor protection as well as extended transparency and reporting requirements in the capital market. The main regulations can be presented in two thematic blocks as follows:
1. Capital market requirements
Introducing a new market structure
Every institution must determine how to continue trading in the future market structure. In this light, the importance of an institution’s strategic direction increases. SKS is not only here to assist you position yourself in the future market under MiFID II, but will also assist you implement MiFID II compliant market structures, processes and reporting procedures.
Organized Trading Facilities (OTF) in the future market structure
Over-the-counter trading (OTC) and other previously-unregulated areas are to be regulated subsequent to the future introduction of a new Organized Trading Facilities (OTF) trading category. This new OTF trading category will likely be home to all trading that does not occur within a regulated market (RM) or multilateral trading facility (MTF).
Systematic Internaliser (SI):
Within the framework of the future market, SI can provide a means of transferring present OTC trading to the future market structure.
SI trading in particular is associated with high organizational and technical outlays. SKS is here to assist you identify SI-relevant instruments and provides its own prototype for supporting SI client functions.
Pre- and post-trade transparency:
Under MiFID II, pre-trading transparency applies both to MTF and SI trading as well as to financial instruments traded on OTF platforms. In particular, bonds, derivatives and structured products with quotes/prices and volumes for trading orders are to be disclosed in addition to stocks. Alongside trade repository reporting, post-trade transparency requirements stipulate that trades be disclosed – depending on the liquidity of the trade (LIS and SSI) – in real time or in the form of consolidated data tapes (Consolidated-Tape-Providers - CTPs). Affected banks are faced with challenge of providing pre- and post-trade data expediently and without error. Our team of technical experts and IT specialists can help you put systems in place that are up to the task.
Tighter rules on algorithmic trading and high frequency trading
In future, high frequency trading will be more closely regulated. To that end, the introduction of an EU-wide system to limit order-to-trade ratios (OTR) is planned. Furthermore, the calculations in algorithmic trading will be subject to more intense scrutiny. Our team of experts is here to assist you with the proper disclosure of these calculations as well as with managing the OTRs for Algo and HFT trading.
Expanded reporting requirements according to Article 26 MiFIR
Comprehensive transaction information be reported under MiFIR. For example, this information must be transferred via an ARM (Approved Reporting Mechanism). SKS can assist with the technical realization of a suitable reporting mechanism.
2. Investor Protection
Independent investment advice
Under MiFID II, investment firms will not be allowed to accept any benefits for independent investment advice or for portfolio management. Moreover, independent investment advice should be provided on the basis of a broad range of products. It will still be possible to specialise in certain products if it can be guaranteed that the specialisation will be made abundantly clear to customers. In contrast to investment firms, providers of securities (ancillary) services may accept benefits. However, commissions and consultancy fees will have to be unambiguously disclosed. Our experts can help you to select your advisory model and the strategic new positioning of your business segments. Please contact us in good time.
With MiFID II there will also be a tightening of product governance rules. In future, investment product manufacturers will have to define their target market at the conceptualisation stage and use scenario analyses to test the product performance under various market conditions. Our experts would be delighted to assist you in the preparation of impact studies and in the introduction of product governance processes that are MiFID II compliant.
Where there is a significant investor protection concern, national supervisory authorities will be empowered, among other things, to prohibit the sale of products. With SKS providing support you will be able to respond rapidly. We can help you to adapt your processes so that product intervention measures can be implemented, without undue delay, quickly and effectively.
New record-keeping obligations will require financial services providers to keep a record of all the business-relevant communication with customers, such as e-mail correspondence and telephone calls and, if required, to make these available to the national authorities. In the course of this, it will have to be ensured that no business-relevant communication with customers take place, among other things, via privately owned devices. The records will need to be stored for at least five years. Our expert consultants can help you to implement an appropriate method for satisfying the record-keeping and data protection requirements.
The first steps with us:
Prepare yourself for the upcoming challenges - for these you can use our market overview and our proven process model for MiFID II / MiFIR. With our prepared, sector specific series of questions we can facilitate an impact assessment that is tailored to your requirements.
Together with us you can clarify the following issues:
- Which MiFID II / MiFIR requirements will affect you in the respective business segments?
- To what degree do the requirements have to be implemented (including a look at possible alternatives)?
- Can a requirement be regulated organisationally or is IT support required?
- Which bank systems and processes will be affected, e.g. new product process?
- What should the implementation plan be like?
- What resources will be required and to what extent?
We can provide you with expert professional support
- through a competitor analysis (peer group comparison),
- in the strategic positioning of your business units,
- with a readiness check adapted for the individual business segments,
- in the preparation of impact assessments and requirements analyses,
- in the implementation of the technical requirements in accordance with MiFID II,
- in the prioritisation and planning of the next steps,
- through the realisation of technical adjustments.
Together with you, we would be pleased to develop individual approaches for solutions. Time is running out - please contact us soon!