5 Key Areas of MiFID II Regulatory Requirements

As we discussed in “Highlights of The New Markets in Financial Instruments Directive (MiFID II)”, firms should plan for significant changes. MiFID II requires financial services firms across the globe to fundamentally review their business operations and processes, while also deciding which markets to continue operating in, and how to position themselves.

In the short term, there are additional costs, but the longer term should be positive, if investors trust the markets and invest more.

MiFID II / MiFIR documentation is hundreds of pages long, and covers far-reaching topics such as Organized Trading Facilities (OTF), transaction reporting, pre- and post-trade transparency, High-Frequency Trading (HFT), open access, commodity derivatives restrictions, consolidated tape, third-country access, synchronization of clocks, and more. However, there are five key areas pertaining to the use of electronic communications that are impacted by MiFID II:

Recordkeeping
Firms must capture records, in context, across multiple communications and collaboration channels from all approved devices. Content, not channel, is determinative. These requirements are broader than the original MiFID. Firms must now capture all communications that are associated with a trade. Records must be available promptly and stored in an accessible and searchable way

Investor Protection and Suitability
MiFID II has a number of amendments pertaining to investor protection. Firms must act honestly, fairly, and professionally in accordance with the best interests of its clients and put their customers’ interests at the center of their corporate culture. Provide clear and relevant information.

Supervision:
Firms must establish supervisory policies and procedures to ensure that managers, employees, agents, and outsourced firms comply with the directive. Firms must have sound security processes to protect both firm and client data. Firms must demonstrate effective oversight and control over policies and procedures relating to firm communications

Trade Reconstruction:
Sell-side market participants must prove “best execution” to their clients and regulators. As a result, MiFID II requires that firms gather together all communications related to a trade upon the request of a regulator. Firms must be able to supply regulators with communications associated with a specific trade. Trade reconstructions must include structured records (such as counterparty and trade identifiers), as well as relevant unstructured records (such as emails, voice communications, chats, electronic messages, and social media) as they pertain to a trade. Retrieval will be key.

Retention and Storage:
Firms must make records available to clients for five years and for up to seven years for regulators. Records must be maintained in a durable medium, such as Write-Once-Read Many (WORM), that cannot be altered or deleted but must be searchable and readily available upon request.

Summary
MiFID II will dramatically change the marketplace and impact nearly everyone involved in the dealing and processing of financial instruments. Investment firms will need to make changes to infrastructure, meet robust requirements for data reporting and broadened trade recording obligations, among many other issues.

There are market opportunities and competitive advantages for those who plan in advance, or potential revenue loss and reputational damage for those who fail to react. Let Actiance help you prepare for MiFID II now.

To learn more about MiFID II and how it may impact your firm, watch MiFD II Requirements with Alcatraz.