WRITTEN BY: ZARA HAMID

What was MiFiD?

In November 2007 the European Commission introduced the Markets in Infrastructure Financial instruments Directive (MiFID) in order to improve financial institutions’ management of investment services in financial instruments. It was hoped that the European directive would increase competition between member states and support the integration of the Eurozone. However, the regulation lacked transparency and dark markets emerged as a result – a phenomenon worsened by the global recession of 2008.

Part II

To correct these negative impacts and support economic recovery, the European Commission implemented MiFID II.[1] This updated regulation is intended to reduce risk, increase transparency, and introduce robust investor protection, and although this was due to be introduced on the 3rd January 2017, the MiFID II deadline has been extended until January 2018.[2]

So, why the delay?

The root cause of the delay lies with the complexity of technical challenges under MiFID II. The European Securities and Markets Authority (ESMA) will have to work with authorities and trading venues to collect data on 15 million financial instruments from 300 trading venues. ESMA informed the European Commission that the requisite IT systems would not be ready by January 2017. ESMA was also keen to avoid unnecessary market disruption and minimise legal uncertainty concerning the implications of the regulation.

How have market participants reacted?

In response to the postponement, many market participants have put budgets and work programmes on hold. They will most likely implement changes to their risk and control departments with off-the-shelf solutions to their existing systems, rather than installing bespoke ones.[3] It is vital that market participants prepare themselves for the implementation of the regulation’s provisions.

How should you prepare?

The delay gives market participants the chance to get their house in order and put in place business processes to cater to these needs. Firms should pay particular attention to increased stringency of trade requirements. For instance, the number of requirements will increase from 24 (under MiFID) to 60. There will also be a heavy focus on accuracy and transparency, for example, information such as copies of clients’ passport will need to be obtained and documented. The delay should also encourage banks to create key performance indicators to help integrate the provisions with much greater ease.

Conclusion

Firms should take the new regulation seriously: non-compliance could result in substantial penalties (with regulators less likely to be lenient given the delay) and reputational risk for institutions. However, the delay should rather be seen as a blessing in disguise, a golden opportunity for banks to ensure that they are truly ready for this new phase of financial regulation ahead of go-live.

[1] For further information on MiFiD II and associated regulations, please read, “MiFID, MiFID II, MiFIR – convergence or just more regulatory requirements”, Kirsten Hall, JDX Blog, March 2015. http://blog.jdxconsulting.com/mifid-mifid-ii-mifir-convergence-or-just-more-regulatory-requirements/ and “MiFID II – A step too far to protect investors?”, JDX Blog, http://blog.jdxconsulting.com/mifid-ii-a-step-too-far-to-protect-investors/

[2] “MiFID II delayed”, Banking Technology, 10th February 2016. http://www.bankingtech.com/435192/mifid-ii-delayed/

[3] “MiFID II compliance – without busting the budget”, GT News, 29th January 2016, https://www.gtnews.com/blogs/mifid-ii-compliance-without-busting-the-budget/