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MiFID II - The Tail

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This MIFID II update provides our readers with an insight into ISC's experience when dealing with MiFID II regulatory projects and our view that the MiFID II "tail" still has a chapter left. There are 3 principle reasons why MiFID II work continues beyond 3rd Jan 2018. This represents "a tail": -

1. Certain aspects did not have to deliver for 3/1/2018 because they involve reporting or disclosure that (whilst based on data from 3/1/2018 onwards) doesn't need to be reported until a later date. Good examples of this are the changes to client reports, costs and charges, publication of the top 5 execution venues, etc.

2. Firms may have implemented on 3/1/2018 with a short-term tactical fix aimed at achieving compliance, but giving themselves additional time to implement a stronger long-term strategic solution (this is not unusual given the tight timeframes that were associated with MiFID II)

3. Project teams support the business as usual(BAU) process for a limited time after 3/1/2018, prior to formally handing over a process to the business full-time

There may be other reasons for continuing past 3/1/2018, but these three are what most clients are dealing with. It's also worth noting that with regulators not being specific about some aspects of the regulation, and expecting firms to apply their own interpretation, there is an element within the industry of "waiting to see" what happens when the regulators complete their initial investigations and release their findings. It is expected that they will find that some firms have interpreted things in a way that the regulators did not intend, and that whilst they are still unlikely to give specific guidance, they may come out with something to say that certain interpretations are not as intended as with the expectation that firms will re-think what they have done. There is no time-frame for this at present and therefore it will probably be MiFID II part two, rather than MiFID II tail. Also, as no-one yet knows what will come out of this, and because it's likely that it will be different for every firm, (for some it might not apply at all), this should be treated it as separate from the tail.

Taking through points 1 to 3 above in turn: -

1. Items not required for 3/1/2018 - The development of these items is probably best done now and not left until the last minute. There are a good number of things that will report for the first time in April 2018, and not many beyond that (although some elements of costs and charges do not have to report until a full year has passed). It is recommended that everything in this category be targeted to complete and ready to be used by end June 2018 at the latest. It is anticipated that almost all firms will stick to this sort of timeframe

2. Strategic solutions replacing tactical solutions - This is very much down to the individual firm. It depends on what those firms still have to do and the complexity of the strategic solution. It is probably best to take the view that any very complex strategic solutions are run as separate projects and not as MiFID II. Small strategic solutions could be implemented as part of a "MiFID II Run-Off project", if all these look to in place by end June 2018.

3. Project Team support - Handover to the business is most likely to apply to Regulatory Reporting (particularly T+1 and Transparency Reporting). It is expected that unless there are significant issues having gone live, both functions will already have been handed over and no longer form part of the tail. If firms have struggled with these, and the MIFID II project team is still delivering big changes; it would not be appropriate to hand it over until such time as they are implemented and the BAU teams have a relatively robust repeatable reporting process. If firms aren't in this position by 31/3/2018, they are in probably in trouble. If their issue is a dependency on a 3rd party (vendor, etc.) there are extenuating circumstances, however, there is some cause for concern and the firm should be in touch with the regulators about this now.

Looking at the key aspects on MiFID II, this is where we believe firms should be now with their MiFID II Projects, and any "tail": -

1. T+1 Transaction Reporting - live and handed over. A short tail if any and should not run into Q2

2. Transparency Reporting - live and handed over. As above, short tail and should be done by end Q1 at latest

3. Research - firms that have paid "hard" should all be working by now and no tail. Firms operating RPAs may still have work to do, but these are few.

4. Best Execution - The key deliverable that might be still outstanding is the top 5 execution venues report. This must be reported in April 2018 so It is expected that this is tied up before end March 2018. Short tail.

5. Costs & Charges - this is where the biggest tail is likely to be. It's complex, confusing, ambiguous, inconsistently interpreted, and has raised numerous questions. The industry is now thinking that the regulators will probably have to look closely at this area and how firms are doing this, (though at present, regulators have not indicated that this is the case). Ex ante, ex post, implicit, explicit, and indirect costs all have issues associated with them. As it is, the lack of clear guidance has led to end investors being more confused than ever and firms are reporting wild variations in similar strategies and asset classes. There could well be a long tail in this area. Any further guidance from regulators or changes that come out in 2018 or beyond, should be dealt with as a separate project.

6. Clock Synchronisation - There are two aspects to this. Accuracy and UTC timestamp. If firms have not already addressed the accuracy piece (depending on their model this is to within 1 second, 1 millisecond, or 1 microsecond) then they are in trouble. This should already be in and there should be no tail. The UTC timestamp is possibly an area where firms have delivered a tactical solution for their reporting, and for any requests for trade reconstruction by the regulators. This is one area where a strategic solution might be aspirational for the long term, and separated from MiFID II as a project.

7. Client Reporting - All clients must get a report every 3 months. Reports delivered in April 2018 are likely to be the first MiFID II compliant reports that will be delivered. Therefore, these need to be ready by end March 2018. The tail should be very short and not go beyond this.

8. Clear, Fair and Not Misleading - Another area where there might be some tactical solutions in place. This is all about providing clients and prospects with the right information. It covers things like financial promotions. Tactical solutions will have needed to be in place by 3/1/2018. If anyone wasn't ready, it's difficult to see how they could have marketed anything in a compliant manner. If firms need a longer term strategic solution, the timeframe is up to them.

9. All the other aspects of MiFID II should be in place now. Everything from Conflicts of Interest to Knowledge and Competency, or Governance to Record Keeping. There might be a few with tactical solutions in place, but everything should be in and handed over to the business by now.

In short, firms should finish their handover to BAU across all streams by end June 2018. If they aren't doing this, it is possibly because they have identified significant problems which need to be quickly rectified, or because they are treating their strategic plans as a continuation of the MiFID II Project. Those firms who want closure on MiFID II would treat them as separate projects, but It is also understandable that any firm that decides that they want to understand the full costs to them of MiFID II may want to keep it all in one place.

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