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Mifid II

Understand the risks of Mifid II and the benefits of unified compliance with MirrorWeb.

In 2018, the European Securities and Markets Authority (ESMA) issued a sweeping update to its previously enacted Markets In Financial Instruments Directive (Mifid). With the introduction of Mifid II, ESMA enacts what The Wall Street Journal refers to as a "massive set of finance regulations --- a regulatory overhaul that reaches into just about every corner of how securities are traded in Europe."

Mifid II's vast reach extends to any and all trading in fixed income securities, equities, futures, exchange-traded goods, and retail derivatives. This, in turn, means all funds, fund managers, banks, trading exchanges, pension funds, brokers, and investors --- essentially anyone whose business involves the aforementioned securities --- must now maintain Mifid II compliance.

The central, stated goal of the Mifid II regulations is to ensure markets are more transparently competitive leading to fair treatment for investors. Key actions are intended to:

  • Strengthen audit and risk management. Mifid II requires batteries of additional reporting and record-keeping relating to trading including recordings of all conversations and correspondence.

  • Reduce conflicts of interest. This is accomplished in several ways, most notably by requiring banks to charge explicit fees for their research rather than bundling trades and research. They must also share data with the entire marketplace within 15 minutes of being made available to others. There are also changes to commission structures and related compensation.

  • Regulate new product development. Mifid II looks closely at new products --- how they function and how they are marketed. Banks, asset managers, and others are now required to report on key aspects of new products even before they can be launched.

  • Limit high-frequency trading. Any auto-trading algorithms must undergo testing and approval for registration plus be equipped with emergency shutdown circuit breakers.

  • Limit "dark pools." Dark pools are a means of masking the trading of large blocks of securities so as to protect prices until a large sale can conclude. Mifid II introduces an annual limit to the degree firms can participate in such markets --- no more than 8% of trading volume per year.

What Is The Cost of Failing To Comply?

That's just a thumbnail sketch of what in practice becomes an expensive proposition. Start with the cost of compliance. Industry watchers such as IHS Markit, a relative of the Boston Consulting Group, says that for the EU's top 40 global investment banks and 400 top asset managers, new processes and technology to enable Mifid II would run over $2 billion in 2017 alone.

Failure to comply leads to fines as well as sanctions such as being prevented from participating in a given security or marketplace. Detailed in ESMA's sanctions and measures report for 2020 national competent authorities (NCA) --- regulators in individual EU nations --- imposed a total of 613 sanctions and measures in 23 of 30 participating jurisdictions. The price paid by the financial services industry as a whole: €8,400,430. Note that this is up sharply from 2019 --- €1,839,000 --- signaling a climate of rising enforcement.

But in addition, by establishing and maintaining Mifid II compliance, financial services companies are protecting their reputations. Reputational damage is generally more costly in terms of lost clients, prospects, and sales than actual fines. In fact, analysts from the Center for Economic Policy Research say losses in share valuation associated with sanctions "are on average nine times larger than the financial penalties imposed by the regulators"

What Are The Record-Keeping Requirements?

Mifid II outlines a handful of articles that delineate expectations for data oversight and collections --- let's call these requirements. Commenting on the whole of such rules, PWC says that Mifid II "requires content to be readily available for inquiry and content reconstruction" and that management must establish "effective oversight and control of policies".

Mifid II provides rules for three principal categories of data:

  • Orders and transactions

  • Telephone and electronic communications plus written notes or recordings of in-person meetings

  • General records on clients, orders, and transactions

The objective is that all information relating to any transaction can be reconstructed to show how the interaction began, evolved, and completed.

All such data must be held for a minimum of five years, although the expectation is that information relative to large transactions and customers should be stored significantly longer. Moreover, such procedures and policies need to be monitored with periodic quality audits.

What Can We Do To Help?

At MirrorWeb we have the technologies and the experience to help your firm achieve and maintain systematic and ongoing Mifid II compliance. For example, Mifid II requires that your data is:

  • Stored in WORM-compliant media, meaning it's unalterable

  • Stored in a durable manner, meaning that it's not vulnerable

  • Backed up, meaning that it's stored in multiple locations

  • Readily accessible, meaning that requested data must be available on demand

Our web crawlers will comb your emails, websites and other initial sources in an ongoing manner making certain to capture everything required by Mifid II with complete fidelity. The data is stored with WORM compliance, backed up at multiple sites. We manage the data, but it remains your asset and can be accessed and searched at any moment. So when the regulators pose a query, you can respond immediately and precisely with confidence.

When you're ready to discuss Mifid II --- we'll be here.