CH&CO MiFID II it is time to get prepared
- 1. MiFID II | Time to get prepared March 2015 Stephanie Baruk sbaruk@chappuishalder.com
- 2. 2 MiFID II | Time to get prepared A step closer to the reality The revision of the Markets in Financial Instruments Directive represents one of the centerpieces of financial markets reform across a multitude of areas, requiring not only major implementation efforts, but also a re-assessment of business models. With the intention to boost competition, promote transparency and encourage financial stability, MiFID II is the cornerstone of multiple regulations that are being implemented at a global, European or national level. Beyond the extension of most of the requirements to other asset classes, we can notice the following evolutions between MiFID and the reviewed directive: Market Structure | Introduces new market structures with the addition of Organized Trading Facilities (OTF), limitation on trading on dark pools, eligible derivatives to be traded on regulated trading venues only OTC Derivatives | Move to exchanges or electronic trading platforms where appropriate, OTC Derivatives subject to EMIR clearing obligations Transparency and Reporting | Expands the needs for transparency and reporting with the inclusion of other asset classes and new reporting requirements tailored to asset classes Investor Protection | Aims to enhance investor protection through upgraded selling rules and the use of pre-contractual documentation Organizational requirements | Stipulates the make up of boards and management committees, and their organizational responsibilities, strengthens internal compliance functions Third Country Access | Sets out rules for those outside the EU to do business with it Position Limits | Lays out restrictions and position limits as well as details on sanctions Within this complexity and broad scope, financial institutions need to start assessing impacts to determine efforts, budgets, roadmaps and ensure that their strategy and organization are aligned for compliance by January 2017 Financial institutions should think about integrating MiFID II under a unique regulatory change program allowing to manage extraterritoriality impacts, ensure consistent and efficient implementation and avoid duplication of efforts
- 3. 3 2-Jul-14 • Entry into force of MiFID II/MiFIR 19-Dec-14 • Publication of Final Technical Advice (implementing rule) Jul-15 • Deadline for ESMA to submit draft Regulatory Technical Standards (RTS) to the EC Jan-16 • Deadline for ESMA to submit draft Implementing Technical Standards (ITS) to the EC Jun-16* • EU Members States to implement MiFID II/MiFIR in their national legislations Jan-17* • Application of MiFID II/MiFIR *Expected date 20-Mar-15 • Deadline for answering ESMA amended consultation paper (incl. proposal for liquidity definitions and size thresholds) MiFID II | Time to get prepared Main impacts Market Structure Introduce Organized Trading Facilities Align RM, MTF and OTF organizational and market surveillance requirements Eligible derivatives are to be traded on regulated trading venues Limitation on trading on dark pools Open access to trading venues Transparency Improve pre and post-trade transparency by expanding scope for Equity instruments and including Non-Equity Improve post-trade quality and availability with European Consolidated Tape approaches Launch Approved Reporting Mechanism for transaction requirements Public firm price quoting requirements for liquid instruments Reporting Additional reporting requirements to regulators External circuit breakers for High Frequency Trading Position limits and public reports with aggregate positions for Commodity Derivatives Governance & Internal Controls New selection criteria and appropriateness with respect to the management body Limitation on the number of directorships allowed to members of management bodies Increased scope and role of Compliance Implement recordkeeping solutions
- 4. 4 MiFID II EMIR Dodd Frank Market Abuse CRD IV AIFMD UCITS MiFID II | Time to get prepared A consistent approach across different regulations is required to avoid duplication and ensure cost efficient implementation • EMIR | OTC Derivatives • Trading on exchanges or electronic trading platforms • Clearing through central counterparties • Reporting solutions need to be aligned • Dodd Frank| OTF and SEF, recordkeeping requirements • Cross-territoriality requirements across OTF trading and swap execution under Dodd Frank needs to be taken into account in each jurisdiction • Ensure that the platform is flexible enough to cater for each set of requirements • Ensure consistency across recordkeeping requirements and leverage as much as possible existing solutions • MAD II | Reporting requirements • Common trade and transaction reporting requirements • Similar audit trail and data infrastructure enhancements, notably reference data and unique identifiers • CRD IV | Corporate Governance • MiFID II incorporates the corporate governance requirements within the Capital Requirements Directive • Limits the number of directorships of members of management bodies at the same time
- 5. 5 MiFID II | Time to get prepared Key Takeaways • With the migration to trading venues and increased transparency requirements, financial institutions will face an increased competition coupled with a reduction of spreads: ⇒ Opportunity to capture market shares through investments in scalable platforms and reduction of operational complexity for your clients • Implementation costs which may be much higher than expected and increased capital and liquidity requirements will call for: ⇒ Products simpler to disclose, fungible and liquid and transactions with more streamlined clients Changes of Business Models Front-to-Back infrastructure & Organization Data Governance & Reporting 1 2 3 • Develop connectivity with key market infrastructures such as CCPs and trading venues • Streamline existing system architecture and processes to ensure extension of trade reporting to other asset classes and to reinforce the control framework • Enhance capabilities for efficiently processing market and reference data • Align the Corporate Governance with requirement with the rationalization of management bodies • Redefine scope and role of Compliance functions • Align MiFID II and EMIR reporting solutions • Set-up a robust data governance framework aiming to identify reporting requirements (from 24 fields in MiFID I to 93 fields in MiFID Il), ensure data quality and accuracy and document origination- to-report lineage • Implement audit trail and data architecture enhancements notably for reference data and unique identifiers • Leverage and strengthen existing recordkeeping solutions • Take advantage of public information to analyze trading behaviors and market trends 5
- 6. 6 MiFID II | Focus on a robust Data Governance - Objectives & Approach Beyond the need to meet regulatory requirements, opportunities remain for banks to benefit from such an exercise Data Requirements Data Dictionary Data Quality Data Remediation 1 2 3 4 1 2 34 Identify Regulatory data requirements for reporting purpose Analyze and interpret Regulatory requirements and leverage existing regulatory reporting Ensure consistency in the delivery of data requirements Act as a bridge with IT with regard to the sourcing of the data Assess on an ongoing basis data quality employed within the bank Establish and maintain operating directives and related procedural guides Develop and maintain data quality framework and operating directive Establish data quality processes and metrics, and act as an escalation point for quality issues Ensure data meets the stringent requirements from the regulator Set-up a robust issue and remediation tracking process Coordinate data remediation initiatives within the bank and handle transversal remediation actions Provide metrics on remediation progress Provide additional comfort to decision makers on risk and regulatory challenges Understand the data from a business perspective and its impact on the organization Define standards for Key Data Elements Support the creation of a central data dictionary and document origination-to-source data lineage
- 7. 7 MiFID II | Focus on a robust Data Governance - Key Roles and Responsibilities An efficient set-up starts by establishing common vision and goals at the Executive level Provide leadership for Data Governance program Responsible for maintaining, rolling out and monitoring Data Governance policies, standards, and tools Coordinate data quality and regulatory compliance efforts across the bank Chief Data Officer Implement priorities established by the Exec Steering Committee Financial Management and monitoring adherence Act as an escalation point for resolving critical issues Provide strategic direction for Data Stakeholders (Data Stewards, Data Owners and Data Custodians) Provide support to Data Governance: Technical Metadata Mapping Technical Requirements for DG tools Data Quality Rules Configuration Data Quality Reporting Data Governance council IT Executive Committee Data Communities Monitor adherence of policies and standards across Data Domains Establish data quality processes and metrics Train staff and communicate data policies Monitor and coordinate any regulatory or internal policy changes Data Requirements Analyze and interpret Regulatory requirements Ensure consistency in the delivery of data requirements across the different stakeholders impacted Act as a bridge with IT with regard to the sourcing of the data Data Quality Establish and maintain operating directives and related procedural guides Develop and maintain data quality framework and operating directive Establish data quality processes and metrics, and act as an escalation point for quality issues Data Remediation Set-up a robust issue and remediation tracking process Coordinate data remediation initiatives within the bank Handle transversal remediation actions Provide metrics on remediation progress Business Glossary & Data Lineage Understand the data from a business perspective and its impact on people, process, and technology Define standards for Key Data Elements Support the creation of a central data dictionary Document origination-to- source data lineage
- 8. 8 MiFID II | Time to get prepared What’s next - Key Success Factors and Priorities Ensure buy-in of the stakeholders and involvement at the executive level to implement changes as early as possible 1 Align with the cross-regulatory reform agenda and ensure that MiFID II is jointly managed with other regulatory initiatives under a unique regulatory change program 2 Implement effective and streamlined post-trade infrastructure as well as robust data governance framework 3 Redefine precisely roles and responsibilities in the control framework and enhance regulation awareness 4 Benefit from public trade information and pre-trade price publication requirements to analyze trading behavior and market trends 5
- 10. 10 MiFID II | Time to get prepared Appendix - MiFID II significantly broadens the first MiFID scope Organizations • Equities • Equities (extended scope) • Derivatives • Fixed income • Commodities • Structured products • Emission allowances • Reception and transmission of orders in relation to finance instruments • Execution of orders on behalf of the client • Dealing on own account • Portfolio management • Investment advice • Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis • Placing of financial instruments without a firm commitment basis • High Frequency Trading • Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash /collateral management • Investment firms • Credit institutions • Portfolio managers • Broker-dealers • Stock brokers • Corporate finance companies • Commodity firms • Market operators • Central counterparties • Data service providers Activities Instruments MiFIDMiFIDII
- 11. 11 PRE TRADE • Equity and Equity-Like instruments: Largely unchanged from MiFID I. Widening to equity-like instruments • Investor protection: pre-contractual documentation, stringent rules of conduct, upgraded selling rules • Systematic Internaliser (SI) Regime : Obligation to make public firm quotes on specific instruments traded on a trading venue for which the firm is SI and for which there is a liquid market (up to specific threshold) • Introduction of Position Limits for Commodity Derivatives • Connection to trading platforms • A volume cap is introduced for use of the negotiated transaction and reference price waivers EXECUTION • Equity and Equity-Like instruments trading obligation on Regulated Market (RM), Multilateral Trading Facility (MTF) or SI • OTC Derivatives subject to EMIR clearing obligation • Introduction of a new trading venue - Organized Trading Facility (OTF) - for non-equities • Operators on trading venues will be subject to enhanced requirements in relation to market surveillance • HFT | Enhanced information requirements, e.g. information on algorithmic traders’ strategies • Stricter control on direct electronic/sponsored access to trading venue systems • Appropriate systems and controls for market- making activity • Best execution principles with strengthened disclosure requirements for investment firms POST TRADE • Widening scope of MiFID transaction reporting obligations to: ‒ Financial instruments which are admitted to trading or traded on a trading venue or for which a request for admission to trading has been made ‒ Financial instruments where the underlying is a financial instrument traded on a trading venue ‒ Financial instruments where the underlying is an index or a basket composed of financial instruments traded on a trading venue • More stringent reporting requirements: complete and accurate details of trades; report no later than close of the working day following the trade • Commodities: Position reporting • Open access to CCPs • Consolidated Tape Providers required to consolidate data into a continuous electronic data stream • Internal organization requirements regarding boards and management committees and their organizational responsibilities • Expansion of the scope and role of Compliance functions • Remuneration policy to encourage responsible business conduct, fair treatment of clients and to avoid conflict of interests MiFID II | Time to get prepared Appendix - Key Requirements Organization
- 12. MONTREAL 202 – 1819 Bd Rene Levesque O. Montreal, Quebec, H3H2P5 PARIS 20, rue de la Michodière 75002, Paris, France NIORT 19, avenue Bujault 79000 Niort, France NEW YORK 1441 Broadway Suite 3015, New York NY 10018, USA SINGAPORE Level 25, North Tower, One Raffles Quay, Singapore 048583 HONG KONG 905, 9/F, Kinwick Centre 32 Hollywood Road, Central, Hong Kong LONDON 50 Great Portland Street W1W 7ND, London, UK GENEVA Rue de Lausanne 80 CH 1202 Genève, Suisse