After seven years, the second iteration of the Markets in Financial Instruments Directive (MiFID II) is finally here. It kicks-starts the largest market reform in over a decade; which will overhaul nearly every aspect of trading and aims to heed the lessons learnt from the financial crisis through increasing transparency and moving trading towards a more structured marketplace.
MiFID II will enable a stronger identification of market abuse, it will inject more transparency and it will lessen conflicts of interest. The new reforms mean that the FCA will be able to pinpoint order flows by the trader, and even by the client.
The most important changes within MiFID II include:
- Investment research: fund managers will have to split out the cost of investment research from the fees they pay their brokers for executing trades
- Dark pools caps: caps will be imposed on the amount of trading that can be conducted on private venues known as dark pools
- Systematic internaliser regime: firms that put up their own capital to fill client orders away from exchanges, will have to register as systematic internalisers
- Trade/transaction reporting: it will be incumbent upon firms to report details of the trades they make to the market and regulators
Ahead of the 3 January deadline, financial professionals and their compliance teams were working all through Christmas and into the New Year, preparing for the changes in time; while regulators were forced to issue eleventh-hour guidelines to firms to avoid a freeze in trading.
While for many the deadline has now been met, this does not mean the work is over.
Even though asset managers are probably now ‘substantially compliant’, having satisfied the FCA with their level of compliance, it could still take them most of 2018 to fully conform. Work undertaken to meet MiFID II requirements will likely have to continue for at least the next six months, due to incomplete implementations, remaining uncertainties, and the potential for further guidance and possible inaccuracies. Concerns remain over the challenges presented and how the regulator will assess implementation. It will still be some time before the major market changes MiFID II will bring come fully into play.
Furthermore, there will need to be a move from tactical solutions to more efficient long-term strategic solutions. Much of the work so far has been focused on becoming compliant rather than thinking strategically about operating in the new regulatory environment. Many firms are nervous about the operational risks associated with the new transparency reporting so continual evaluation and improvement will be critical, as we move get beyond the essential requirements of MiFID II and develop best practice.
To thrive and take advantage of the opportunities MiFID II presents, firms will need to respond appropriately; step back and consider where their responsibilities – and capabilities – lie and how to improve their business models to secure the best outcomes for clients while delivering confidence, trust and transparency.
One of the biggest amendments brought about by MiFID II is the developments in call recording. A wave of enhancements has overhauled every facet of call recording; from the storage duration and the use of recordings, through to enforcing call recording on organisations who previously were exempt. One of the most impactful day-to-day changes is the requirement to record any phone calls with clients that are “intended to result in a transaction being undertaken” – and all conversations must be now stored for at least five years.
While new call recording systems may be in place, this is only half the battle. Now the deadline has passed, compliance requirements come face to face with real life. For example, you may also have to enforce rules on not communicating with clients through “unofficial” channels such as messaging services; while reporting is needed to track how the compliance programme is operating and that it’s recording and storing calls properly. And most importantly, in the event of a problem, firms need to be able to demonstrate that they are taking compliance seriously.
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