August 2017

MiFID II: A Blessing in Disguise?

By Nick Taplin, Pre-sales

A couple of months ago, our CTO talked about the importance of innovation in staying ahead of the market, and how we manage this at Duco.  In this post I want to look at how regulation can force innovation, to firms’ advantage.

The eternal sunshine of the stagnant technology landscape
It’s no secret that many financial firms struggle to innovate at both ends of the spectrum. Niche asset managers can legitimately see investment in R&D as a direct tax on their fee revenue. Large investment banks suffer from hard-to-navigate hierarchies and labyrinthine procurement processes that make positive change more difficult.

It is rarely enough to identify inefficiencies and use these to create a business case when there is a stopgap solution which can be ‘temporarily’ introduced. The consequence is that many financial firms find themselves in one of two situations:

  1. They are stuck in a cycle of temporary fixes and manual workarounds (typically supported by expensive consultants and outsourcing agreements) or
  2. They are making do with a legacy system which is no longer fit for their evolving purposes

In my time I have witnessed many incidences of resistance to change. Possibly the most extreme case was a firm that had placed some of its key systems on in-house hardware that was initially considered fool-proof. This hardware had been implemented to support a mainframe system which had been patched so many times that it could not be upgraded, and was incapable of working with the volumes and asset classes we see in the market today. Ultimately, the only way to keep the hardware running was by sourcing spare parts on eBay!

Stories like this are not unique.

Regulation as a catalyst for change
Isaac Newton codified one of the fundamental laws of the universe in his first law of motion: ‘objects will either remain at rest or (if in motion) continue in motion at the same speed and in the same direction unless acted upon by an external or unbalanced force’.

This law feels especially applicable to finance. Nowhere in finance is there an external force more unbalancing than wholesale regulatory change, and nowhere is there a regulatory change more far-ranging or more disruptive than MiFID II.

As a result, MiFID II has been one of the major talking points for the past year. Thousands of seminars, conferences, and publications have explored it in depth (including two whitepapers by Duco on transaction reporting and data reconciliation). Yet the overwhelming sentiment expressed by the industry is that firms are not ready for the deadline.

For example, a recent JWG survey found that 90% of buy side firms don’t feel they will be ready by the deadline and 45% aren’t even certain what compliance entails.

In addition, fines for non-compliance could potentially include provisions for £1.50 per misreported record up to a total value of 10% of company annual turnover (based on penalties announced for other MiFID requirements). There is consequently a very clear and present reason for firms to overhaul their technology programmes.

A problem, or an opportunity?
MiFID II is creating new requirements across all divisions of firms. Some of our customers are implementing as many as 80 new reconciliations for MiFID II data verification purposes. Change is being forced onto departments, and it’s vital that those selecting technology solutions do not add to their problems by implementing another series of workarounds which will inevitably cost more in the long run.

Even at this late stage, MiFID II should instead be seen as an opportunity for firms to refresh their technology landscape and invest in scalable, modern platforms fit for today’s purpose and the future.

Key challenges: data integration and quality
The regulation itself has made some preparation work easier for customers, notably by extending the use of Approved Reporting Mechanisms (ARMs) – such as Nex Regulatory Reporting – which have already reached a degree of maturity thanks to their use under the original MiFID regulation. Customers still need to select their ARM, of course, but much of the headache can subsequently be outsourced to the provider.

Of more concern is the integration of the many new data sets and enrichment routines that transaction data must undergo to fulfil reporting requirements on the basis of a relatively limited amount of point-of-trade information.

Furthermore, this needs to be carried out against a backdrop of uncertainty and change. Many firms have not yet applied for LEIs or mapped their internal counterparty databases to the GLEIF standard. Local regulators are not certain when they will have a finalised list of the eligible reporting securities. Firms do not know where exactly personal trader and responsible person information will be stored and added to the record.

Each of these uncertainties is another hurdle on the path to compliance, and negotiating them is going to take us so close to the deadline that only the most agile solutions will be able to cope.

A checklist for vendor solutions
With this in mind, and in the spirit of innovation, we suggest evaluating any solutions against the following criteria before making a buying decision:

  • Consider implementation times: This applies well beyond MiFID II, but it is generally true to say that heavy, on-site installed systems are a great deal slower to implement than more modern SaaS or hosted services. In the case of MiFID II specifically, an on-site implementation may not even be feasible within the timelines.
  • Be prepared for requirements to change: As mentioned above, the landscape is shifting constantly. Systems implemented today for MiFID II will need to be adaptable and flexible enough to cater to the new reality on 3 January 2018. Hard-coded rules, inflexible schemas, fixed data imports and intractable workflow processes will all introduce delays, costs, and risks.
  • Usability: For too long, financial technology has been synonymous with complexity and long training cycles. Modern systems, however, are designed with the users in mind, simplifying processes and focusing on the user experience. This improves internal adoption and means both faster time to market and faster investment returns.

Our approach at Duco
The complexity and uncertainty around MiFID II requirements have put the criteria above into sharp focus, but in truth this is the direction the industry needs to be heading anyway. We recognise this at Duco and have always been focused on providing solutions that specifically cater to these issues.  Our reconciliation system Duco Cube:

  • Is live in 24 hours
  • Puts control in the hands of the users who know the data best
  • Can be adapted instantly to cater for changing requirements
  • Has the power and flexibility to scale from the smallest data set with simple rules right up to multi-million row processes demanding the most complex logic

We also make sure that we partner with firms who share the same outlook. In terms of MiFID II, we have joined forces with NEX Regulatory Reporting to provide an end-to-end solution that meets the accuracy, transparency and reconciliation requirements of the regulation.

Perhaps best of all, Duco Cube is a fully SaaS solution, upgraded every month, so you’ll never need to source spare parts on eBay.