Mon, 10/04/2017 - 12:39
Nick Bayley is a managing director in the Compliance and Regulatory Consulting practice at Duff & Phelps. Prior to this, Nick was a Head of Department in the FCA's Markets Policy & International Division, FCA Senior Markets Adviser and was responsible for the UK regulator’s MiFID II Policy Project.
Last month the Alternative Investment Management Association (AIMA) published a ‘MiFID II Vendor List’, to help firms that haven’t made decisions about which third-party vendors to use.
Choosing one’s preferred suppliers should ideally be a relatively straightforward process but my advice, particularly to MiFID investment firms, is to act quickly, because some of the more recognisable names on the AIMA list could soon become saturated by client demand. This is certainly possible for those offering transaction reporting services as an Approved Reporting Mechanism (ARM).
We are not yet there but clearly you don’t want to be disappointed to find out that your preferred choice is simply too busy. Of course, this also means having to appoint a vendor lower down the quality stack, perhaps someone who has jumped late on to the massive MiFID II bandwagon and, frankly, may not have a very good understanding of how this complex legislation is supposed to work.
Whether it’s best execution monitoring in the non-equity space, electronic record keeping, or governing Research Payment Accounts, there are numerous decisions that firms need to make about their technology, going forward. Rather than bury their heads in the sand, firms that are smart and embrace the changes being brought by MiFID II could use their vendor procurement process as an opportunity; to help improve their businesses not merely keep them in compliance.
But the sand in the egg timer is running out. People have not got long to make these important decisions.
Perhaps fortunately, in the hedge fund world, it is only the investment firms who face having to publish their OTC trades to the market, as well as transaction reporting to their regulator, under MiFID. And the deadlines for publishing trades to the market are tight; firms that have post-trade transparency obligations need to get the data out of the door very quickly, less than a minute in the case of share trading. A challenge perhaps for those firms that have not had such deadlines before.
Similarly, transaction reporting, although less time critical, has to be right to avoid incurring the wrath of the regulators. This is an area where the FCA has dished out some big fines for what appear to be largely administrative errors – such as duplicate reporting or incorrect venue identification.
But unfortunately, transaction reporting is not just a case of connecting to an ARM and pressing the send button. There are up to 65 different fields to be populated to transaction report, covering a wide range of information types, which investment firms will need to collate and check before sending off to the ARM. Some ARMs will be able to help you with this but not all of them offer consultancy services as part of their offering.
How firms are meeting their best execution obligations in the non-equity space is something that regulators are almost certainly going to be interested in. A very recent FCA publication on best execution in the asset management space flagged what it perceives as a lack of quality in firms’ performance in this space and referenced the need to be ready for MiFID II. Firms should be questioning their current providers to see if they are up to the job or perhaps thinking about finding new ones.
Engage with potential vendors early. Talk to them about what they can provide by way of additional services that will help you with your MiFID II challenges. Talk to your peers and seek advice on who the best service providers are. Some vendors are better suited to smaller and mid-market firms, while others tailor their offerings to larger clients.
To simply hope that your existing system providers will inevitably be up to the task of delivering MiFID II solutions may be a mistake. The firms that get the best results are those who choose vendors who understand the regulations and have a firm grasp of the details, in addition to providing the necessary technology expertise.
Many of us have had the last minute, Christmas Eve experience of racing around the shops, looking for a present for someone special, only to find that the time pressure forces us to choose a less than perfect gift.
MiFID II will probably cost you a fair chunk of money to achieve compliance – a staggering Euro 2.4bn across the whole financial services industry by some estimates. Your cash was hard earned, spend it wisely…
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