While the full regulatory impact from MiFID II for trading and investment firms is not expected to begin until 2017, the burden on them is significant as the regulation has wide implications for operating and business conduct models. As I introduced last week, yes, the challenges are considerable, but the opportunities are significant—that is if firms are ready to overcome a number of key hurdles. This week I’ll conclude my series by exploring the two remaining challenges firms will need to confront if they want to seize the opportunities.
Challenge: Provisions for pre- and post-trade transparency
Provisions for pre- and post-trade transparency strengthen and extend the trading and disclosure requirements to all forms of trading and all asset classes. Previously MiFID’s transparency rules only applied to share trading in regulated markets. Because of this, companies need to take appropriate steps to master the greater transparency requirements demanded by MiFID II.
Among other things, the new processes for bonds, structured products and derivatives must be taken into account, which will require significant adjustments of systems and processes across several trading systems of financial services providers.
Challenge: Provisions for internal organizational set-up and risk control
These provisions give more weight to risk control and a firm’s supporting internal control function. The extended requirement for investment firms to continuously evaluate regulatory compliance with MiFID II creates a need for extended risk control procedures and measures, but also calls for a consistent risk framework to support the effectiveness and efficiency of these risk control procedures and measures.
Opportunities arising from MiFID II
There are numerous opportunities available to investment firms throughout the analysis and implementation phases of MiFID II, which fall into five main categories:
- Improved client service tailored to the required client classification.
- Additional market share through client tailored products.
- Reduction of operational costs if digitization and automation are used to implement the changes.
- Stronger control environment and a reduction in reputational risk through greater surveillance and monitoring.
- Reduction of costs for reporting infrastructure if a centralized repository is leveraged across MiFID and other regulations such as EMIR, FCA Transaction Reporting.
Bottom line: the time remaining for meeting MiFID II requirements is not as generous as it seems. Investment firms should now be considering the ramifications for business strategy and operations, and act accordingly.
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