MIFID II - The Sequel
When Hollywood produces a movie sequel, it's invariably not as good as the original, and is purely made to cash in on the success of the first film. You only have to look at such exploitation fodder as "Crocodile Dundee II", "Speed II: Cruise Control", "Son of the Mask", and the atrocious "Highlander II: The Quickening" to see that. But regulation is a very different matter, and whilst the numbering system might be the same, that is pretty much where the comparisons end. Of course you do wonder where each piece of regulation might stop. UCITS V for example, is right up there with the Rocky films for instalments. But MiFID II is something follow-up to the small independently made, but more akin to a Hollywood blockbuster trailblazing original.
Indeed, some industry voices are saying that MIFID II is potentially the biggest single piece of regulation ever to hit the industry. While some will argue that this is not the case, the sheer heat and light generated in terms of debate and senior management activity, leaves no doubt as to its significance.
The details are well defined now in a form that the industry can plan for, with almost 15 months to go until implementation date. But for the asset management industry, the key challenges are in sizing and shaping the project to achieve a seamless implementation: -
1. How big should the project be?
2. How many dedicated project managers and business analysts will be required, and how can these be complimented by the "business as usual" resource seconded (full or part-time) to the project to assist implementation?
3. How should the project streams be broken up?
4. What areas are those of the greatest priority?
5. Which will take the longest?
The questions are many and varied. Of course there are no hard answers, as every asset management house will be different, but perhaps there are some basic assumptions that can be made which apply to all.
The industry as a whole seems to have agreed that the first piece of MIFID II demanding action is the Market Trade Data Reporting. The additional fields are there to afford yet greater transparency, and despite the questions being asked around some of the more ambiguous definitions, there is enough hard fact to work from to make a big hole in this piece. Any Asset Manager who has yet to start on this part of MIFID II is already playing catch-up, but thankfully, anecdotal evidence suggests that there are very few who fall into this bracket. Understanding the fields and the definitions is just the start. Careful planning around the new data fields will need to extend to how to go about getting/maintaining the data to populate them, which systems to maintain/store them on, and in particular how to make sure that Highly Confidential Information required (individual passport and NI numbers) is kept in such a manner that there are no breaches of ICO rules and regulations. Anyone enhancing existing internal systems will face an extensive analysis, design, build and test phased project. Getting assurance along the way that you are compliant in your efforts will be an important part of the puzzle, as the last thing you need is to launch on live date only to find that you've misinterpreted something fundamental. The industry thankfully has places to turn to make sure this doesn't happen, but ignore these at your peril! One particular aspect of the reporting requirements is the need for Legal Entity Identifiers (LEI's). Of course under EMIR these are already reported, but only for entities with EMIR reportable trades. Analysis may be required to assess whether there are any funds or clients who have never required those LEI's but will under MIFID II.
As a second priority, transparency of information to clients on costs and charges is another area that the industry agrees should be receiving attention. This will include pre-sale disclosures of service/product costs, as well as those incurred ongoing during the product/service lifecycle, including effects on returns, spikes and fluctuations, as well as explanations of these costs.
The complexity here will vary for different Asset Managers, but an early assessment of how you can separate, and report these costs and charges is highly recommended early in your MIFID II project. At the same time, and linked to this, the unbundling of research commission from the vagaries of the existing execution commission (which falls under "Inducements"), is also generating action among Asset Managers. Whether to "pay hard" and what research to receive and pay for are key questions facing buy-side firms within the industry.
Beyond these initial aspects, there are a whole host of other subjects to be considered within MIFID II. Many fall under the classification of Governance, Policies and Procedures, and would appear to be those that most Asset Managers are a little more relaxed about. Obviously, all existing arrangements will need to be reviewed, but whether they need to be changed is another matter. Your internal governance, policies and procedures may already be stringent enough to meet the requirements, but they may not. Furthermore, logic would suggest that changing policies and procedures should be far easier than having to build systems to accommodate (for example) additional Market Trade Reporting fields, or reporting additional information on Costs and Charges, but this does depend on the type of organisation you are.
Assessment of the priorities is the first step for anyone planning their MIFID II Project. From there, determining the size of each key piece will very much depend on the operational structure and investment profile of the organisation. There are stories circulating of some firms setting aside huge project budgets of several millions, and dedicated project teams numbering close to double figures to steer them to MIFID II conformance. Whether this is justified or not remains to be seen, but erring on the side of caution may be no bad thing.
At the same time, while it is tempting to look at the MIFID II project simply in terms of conforming to the regulations, is there also an element of thinking about the way the markets will look once MIFID II has been implemented? Whilst no-one has the definitive crystal ball, the changes may well be driven into the markets post-MIFID II live-date. For example, if high-frequency trading drops significantly, (as some have asserted it will), will that affect liquidity in the markets? And if so, what will be the effects and what will firms do to adjust for this? What other effects will MIFID II have on markets in 2017 and beyond? Each firm should perhaps take some time to assess what it believes the MIFID II impacts will be on the markets, and those that have considered and prepared for the impacts, may be best placed to adjust their strategies as the changes take their effect.
One thing is for sure, MIFID II will require a lot of effort, thought, and planning over the next 15 months, and possibly beyond, within the Asset Management industry. So when it comes to sequels, MIFID II is probably best compared (within the movie genre) to "Terminator II". Bigger, bolder, and badder than the original, but with the same ultimate premise. Here's to the future. Roll on 2017!