Getting to grips with MiFID II


Following the release last month of the Draft Regulatory Technical Standards (RTS) and Regulatory technical and implementing standards Annex 1 for MiFID II / MIFIR firms and their regulatory experts and consultants will by now be deep into the technical details.

Whilst some firms have voiced concern that they will struggle to implement the technology changes required, others are already looking to turn regulatory compliance into competitive advantage. The clock’s ticking towards MiFID II implementation on 3rd Jan 2017, and the FCA has indicated that new authorisation could take up to six months, so really no time to lose.

As can be seen from the impact assessment heat-map below, MiFID II is all encumbering, and will impact almost every aspect of a firms business and operational model, affecting how most OTC products are priced, traded and reported.

MiFID II Impact2MiFID II Impact assessment (E&Y Jul 2015)

A huge amount has already been written on MiFID II, and the challenges it will bring around implementing some of the mandates. Particularly relating to the huge increase in quality data required to comply with pre/post trade transparency, BestEx and reporting mandates – which I mentioned may have been a consideration in ICE’s decision to buy IDC.

In terms of trading venues, under MiFID II, the new category of venue called Organised Trading Facility (OTF) will be created. An OTF will have discretion over how to execute, but will not be permitted to use their own capital, although will not be permitted to connect and share orders with other OTFs. It is expected that Interdealer broker platforms will become OTFs.

Another category of platform, is the Systematic Internaliser (SI), where for non-equity products, the trading protocol will be RFQ, although not clear how they view streaming quotes, and the operator can execute on a bilateral basis, and has discretion on execution, and can employ their own capital. In addition, the SI will be required to make quotes available to other clients within the platform. However, the owners of SIs will not be permitted to own an OTF in the same legal entity.

It is expected that a number of bank Single-Dealer Platforms for instruments such as bonds will become SIs.

I came across a series of informative videos from the Financial Conduct Authorities (FCA), covering the MiFID II wholesale firms conference 2015, which was held on 19th October.

I found the following videos of particular interest:

Full list of videos available here.

Just come across another great article on Tabb Forum, from Gary Stone, Chief Strategy officer at Bloomberg Trade Book, talking about how MiFID II will impact the entire buy-side investment process / Trade Life Cycle.

He provides a nice graphic showing the stages and the impact of MiFID II on the process, which I show here:

Buyside Investment Trade lifecycle

Anatomy of an Investment (Bloomberg)

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