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Understanding MiFID II: Implications for Alternative Investment Managers

Understanding MiFID II

MiFID II is due to come into force in January 2018. Understanding MiFID II, and making appropriate preparations, is essential for alternative investment managers trading in the EU.

The Markets in Financial Instruments Directive (MiFID) framework, which was originally applied to the UK in 2007, is set to be replaced by MiFID II on 3rd January 2018. MiFID II will have implications for any alternative investment managers who trade financial instruments in the EU. In this blog post we’ll help firms seeking to understand MiFID II, its implications, and the considerations that should be made between now and January 2018.

What is MiFID II?

The original MiFID, which has been in force since 2007, is the EU’s legislation for regulating firms dealing with financial instruments such as shares, bonds, units in collective investment schemes, and derivatives. MiFID is intended to improve the competitiveness of EU financial markets by creating a single market for investment services and protecting investors. It sets out: –

  • Organisational requirements for investment firms;
  • Authorisation requirements for regulated markets;
  • Regulatory reporting in order to avoid market abuse;
  • Trade transparency obligations for shares;
  • Rules on the admission of financial instruments to trading.

MiFID II extends the scope of the existing MiFID legislation, following developments in the decade since MiFID was released and especially in light of the 2008 financial crisis.

What are the Objectives of MiFID II?

MiFID II is being introduced in January 2018 with four primary objectives in mind: –

  • Enhance investor protection. MiFID II will require greater commitments from firms in terms of investor communication, disclosure, and transparency. By introducing these commitments, the EU is aiming to enhance protection for investors on whose behalf firms carry out transactions.
  • Alignment of regulation. MiFID II will introduce updates to the existing MiFID regulations that will create greater regulatory alignment in a number of areas.
  • Increased competition. One of the founding principles of MiFID was to promote competitiveness across EU markets. Increasing competition further is a key objective of the updated MiFID II regulation.
  • Reinforced supervisory powers. MiFID II will reinforce supervisory powers, both pre- and post-execution, and will introduce greater powers for governance and oversight.

MiFID II will have a profound effect on how regulated firms carry out their business. But what about how they manage their IT systems?

Preparing IT Systems for MiFID II

Capital Support deliver IT infrastructure and support services to prominent alternative investment managers based in the UK, Europe, and beyond. We understand the importance of preparing IT systems for MiFID II, and we are working with our clients to ensure that, come 3rd January 2018, they are prepared for the new regulations.

When it comes to your IT systems, we recommend making the following considerations: –

Data Storage

As part of MiFID II’s investor protection and supervisory power objectives, alternative investment managers will need to keep copies of all communications relating to client orders. This will (potentially significantly) increase the amount of data that firms need to retain. With a minimum retention period of five years (increasing to seven if requested by the FCA), your firm should consider its backup and retention policies and whether they meet MiFID II’s requirements. Storage costs will also be a consideration, especially for firms that carry out a high volume of transactions.

Voice Recording

Along with electronic correspondence, MiFID II will require that firms retain recordings of calls – both from landlines and from mobile phones – if they relate to transactions, even if they do not ultimately execute. If your firm does not record and store copies of calls through an effective voice recording system that covers mobile phones as well as landlines, you will need to implement appropriate measures to address this in preparation for 3rd January 2018.

Reporting and Data Management

The new MiFID II regulations will require alternative investment managers to report on trades by the end of the following working day. And with the number of asset classes covered by MiFID II reporting rising to 65, firms will need to consider carefully how they manage and report on diverse, potentially complex data sets. Your firm should ensure that its data management and reporting systems are sufficient to handle the additional requirements that MiFID II will bring.

Data Recording and Transaction Reporting

A fundamental requirement of the MiFID II framework is the ability to reconstruct trades. Put simply, your firm will need to be able to accurately reconstruct trades – whether or not they were executed – from a number of constituent elements that reside on multiple different platforms.

This will mean recording, storing, retrieving, and analysing data from mobile and fixed line calls, emails, files in your file store, instant messaging, and of course your PMS, OMS, and EMS.

Are your systems capable of amalgamating and reporting on this information quickly and easily? In order to prepare for MiFID II, your systems will need to record and store transaction data in a manner that enables rapid responses to regulator requests. This will need to be budgeted for, and your vendors’ SLAs will need to be aligned to regulators’ requirements.

Understanding MiFID II

The new regulations being introduced on 3rd January 2018 will have consequences for the way in which your firm – and your IT managed services provider – configures and manages its IT systems. Understanding MiFID II is the first step towards putting in place the necessary systems and processes to meet the new requirements. Contact Capital Support if you’d like to learn more about MiFID II and how you can align your IT systems to the directive’s requirements.

Toby Shackleton
Toby Shackleton