How Will MiFID II Change Data?

How Will MiFID II Change Data?

Managing Director of RFA George Ralph discusses the technological implications of Mifid II with HFM Week.

HFMWeek (HFM): The draft of Mifid II technical standards were published in December 2014, what can banks and capital market institutions do in terms of preparation for Mifid II?

George Ralph (GR): There are two major challenges when it comes to preparation. First of all, preparing people for the inevitable, there are a significant number of people who are not doing anything due to an expectation of continuous delays. The second being the unknown, Mifid II is yet to be finalised, it is subject to relentless changes and we have not seen a nailed down and concrete form yet. When Mifid II was first announced, we released a successful five-step guide, this guide was from a technical standpoint and highlighted a number of factors to support organisations. The first point was really helping organisations understand, one, what the actual scope of work is in order to fulfill the requirements. Two, to identify gaps in their current communications infrastructure. Three, to identify data retention requirements (if it can’t be compressed, what impact it has on costs, security, storage techniques). Four, to work out their data lifecycle management (how are they going to store the data, are there any SLAs they need to think about in terms of the retrieval of the data, how the data moves throughout the lifecycle), and five, find a trusted partner to help plug any gaps.

HFM: What are the major technological implications presented by Mifid II? And how can they be overcome?

GR: There are a range of views in regards to technological implications; there are technical implications from a infrastructure perspective and technical implications for the kind of recording methods used i.e. face-to-face meetings, text messages, mobiles and landlines and also the changes in customer reporting, for example the classification methods. One of the biggest challenges we are going to be witness to is not just where to store the data, but how to report quickly on the transactions against multiple file types, as there has been an estimate of a five minute window for transaction reporting. An example of issues surrounding reporting, you may have a mobile recording which is a wav file and then a landline recording which is a wav file, but are both probably saved on different systems, additionally, you may have a text file from SMS. Alongside this, you may be conducting faceto-face meetings and you have to digitalise the minutes, that’s another format, how do you report on all of those in one place when they all have different file types? This is certainly the most challenging obstacle presented by Mifid II, and as to date I am yet to see a product that amalgamates ‘all’ of these file types in a sensible and secure fashion.

HFM: How important will be launching or re-configuring a customer-facing portal to increase client interaction?

GR: This is going to be extremely important because of transaction reporting, the whole wording of the data classification type is going to be taken very differently by different people. There aren’t many investor reporting tools out there that can be used straight off of the shelf, they have all had to have been customised one way or another, or developed on their own. You are essentially going to change the metadata of all of your client’s information on your reporting tool, the solution to this will be to either employ someone to sit and update all the data, or you are going to automate the change to classify. In terms of the customer facing portal and what we are re-configuring it to make it easier to use for the investor to view and what is happening in the space of the clients, I think that’s not necessarily challenging, because most people will have outsourced development if they’ve already customised it. In order to offer the right levels of protection to the right clients, a robust client classification and related client data repository should be built and maintained. Many firms have something like this in place, but Mifid II will add new data attributes and will amend others. I think that’s one of the things that will change quite drastically before it is actually finalised.

HFM: What technological implications will Mifid II have on data?

GR: It’s all about data and the major issue is stage one i.e. how we store it all. If you are recording landline calls, texts, mobile calls, etcetera, you are going to be accumulating a tremendous amount of data. I’m not sure whether the smaller hedge funds will be able to do it economically, potentially, it will force some of the less successful hedge funds to consider using incubation type firms more. The second challenge will be reporting against the data, the fact is that there will be a selection of different data types stored in different locations, so unless someone comes up with a unique database that allows you to store different data types, then this will certainly be a big obstacle.

HFM: How will transparency reporting affect the industry?

GR: The whole point of Mifid II and Mifid I is to improve ‘market integrity’ by making trading activities more transparent. In terms of transparency affecting the industry, I don’t think it will have a massive affect, as we are all doing a lot to prove the integrity in the space. It will continue to protect investors, as it will provide them with even more information than they have now, which should hopefully give them to ability to make more informed decisions. It also adds protection the other way
as firms can prove what they were requested to do. For example, if an investor calls and says: “Put this amount of money on this fund,” and that’s not recorded, and then call back a year later and say “well I didn’t actually ask you to do that I meant the other one,” this will massively reduce the chances of this happening.

HFM: What will happen to the banks and capital market institutions that do not prepare adequately when Mifid II arrives?

GR: The whole point of Mifid II is not just to be a compliance exercise. It is not simply about adding another level of regulatory control, there are also major strategic implications. Although, it can additionally bring market opportunities and if firms get it right early on, it could potentially give them a bit of a competitive advantage in the future. If people don’t adhere to Mifid II and therefore don’t meet the requirements, they’ll lose revenue as they will be fined. At the end of the day, if they don’t do it, it’s going to cost them money and potentially investor security.

Published in HFM Week, March 2016