15 December 2017
By Lydia Appel and Phoebe Cutter

The 2008 financial crisis uncovered that the existing regulatory governance framework over financial instruments was limited and subsequently lead to a suite of new EU regulations to ensure the safe and efficient running of Capital Markets. The introduction of the Markets in Financial Instruments Directive (MiFID) in November 2007 aimed to increase investor protection and enhance competition across trading venues to promote more liquid markets. With the launch date of 3rd January 2018 fast approaching for MIFID II, the latest EU financial regulation, all firms involved with the trading of financial instruments must get up to speed to comply with a new set of complex rules and regulatory requirements seeking to further enhance investor protection and increase competition.

Following the introduction of MiFID in November 2007, competition between trading venues increased in conjunction with the emergence of new trading venues and a reduction in trading costs. However, whilst the new rules had a positive impact on competition and efficiency in financial markets, there was a lack of enforcement and fragmentation in national implementation. The revised MiFID II legislation aims to cover a much broader scope of products across Cash Equity, Fixed Income and Derivatives, functional areas and industry participants (Buy Side, Sell Side, data providers etc).

The key goals of the new legislation include the following:

• To achieve greater transparency for trading activities
• To create fairer, safer and more efficient markets
• To increase investor protection

MiFID II comprises a string of new provisions aimed at protecting investors affecting the existing investor advisory process, financial product control for issuers and distributors, reporting to clients throughout the trading process and in parallel providing a more granular view on the costs of trading.

As the deadline is fast approaching, firms are facing enormous pressure to comply with the complex requirements. But as with many recent new financial services regulation, lack of clarity on the rules and requirements make it very challenging to comply. However, with MiFID II it’s the breadth of industry participants impacted that is the major challenge.

The impact will be across the entire value chain from data providers, execution venues, price makers & takers, investors, custodians and other infrastructure providers. In the long term, MiFID II will structurally change the end-to-end value chain due to the requirements and, undoubtedly, costs to comply. The implementation process will not simply involve changes to one or two systems but front to back infrastructures will have to be developed and fine-tuned, ultimately challenging existing business models.

Through compliance with the regulations and the re-assessment of business models, potential opportunities will emerge, which, if firms can exploit, could generate a competitive advantage. For example:

• New and innovative ways to conduct business
• Increased revenues through access to new trading venues
• Reduction in unit costs through economies of scale
• Strengthened risk governance and internal controls
But as is the world we live in today, it’s all about data. MiFID II obliges firms to collect significantly more data points, which will especially impact transactional reporting, expanding to cover much more rigorous detail on the part of brokers and investment managers. Increased data complexity dictated by the new requirements encompasses data sourcing, data management, publication and distribution of data. Many firms may leverage MiFID II as an opportunity to adopt a more strategic and holistic approach to data management, creating new capabilities to increase their business agility through more effective use of data. Due to its scope of different asset classes reassessing firms data architecture to link various systems including OMS/EMS, regulated markets (exchanges), MTFs, OTFs, Systematic Internalizers, LEI’s, KYC and APA’s will be critical. Moreover, leveraging time series databases for the efficient storage of transaction data, reference data and market data will allow firms to maintain the edge.

With 9 business days to go, the capital markets industry is about to face the biggest change in financial markets infrastructure for decades. It is difficult to assess how prepared market participants are. What is clear, firms who are using this regulatory milestone as an opportunity to revisit their end-to-end architecture (data, process, application) to ultimately drive a new business model will capitalise on this change, leading to increased competition. What is not clear, and only time will tell, is whether MiFID II will deliver on its other objective of increased investor protection.