Cocktail Parties, Christmas Plans and MiFID II

Bloomberg recently reported about the ticking clock for MiFID II and how the regulatory change due to come into effect in January 2018 has impacted the working lives of financial professionals on both the buy and sell side. As reported in the article: “If you have started MiFID II projects too late, you won’t have time for anything else for the rest of the year and can’t even celebrate Christmas,” Christian Schoeppe, the head of currency trading at Frankfurt-based Deutsche Asset Management, said in an interview in Barcelona. “This is probably something that has been underestimated across the industry” and “it’s eating up so much time.”

Many people, including me, have been spending most of their free time studying the rules, the ESMA guidance, and the regular Q&A updates. Although I haven’t been raising the issue at cocktail parties, it has been a ready topic for coffee breaks.

The hundreds of pages are heavy going, and if you need a cure for insomnia then the 553 pages of the ESMA Regulatory Technical and Implementation Standards for MiFID II / MiFIR are a good start. Each standard is pretty detailed, and it has taken me a few reads of the text and studying the appendices to make some sense of it. Still, there is room for interpretation of each standard, and that is where the conversations with colleagues and customers have been leading.

I’ve seen different levels of involvement and approaches throughput my sell side, buy side, and exchange customers. Some started early and are now focusing on testing and reconciliation. Others are still pretty early on in their testing and implementation processes. A common theme is the splitting of the regulation into separate project teams — one for each reporting requirement (RTS1 to 28). This is good from the point of view of optimizing the teams’ work, but the potential downfall of this approach is that a lot of data and understanding is common across the technical standards. Different teams can easily end up with different interpretations of key metrics depending on the RTS.

My customers who are more advanced in their best execution implementation are now spending time on the reconciliation process. Specifically, what to do when the regulator (or customer!) comes knocking and asks how the final numbers were determined. They can quickly pull out a regularly produced best execution report that summarizes millions of orders and trades. It provides the detail they need to reconstruct exact past trading behavior and justify each decision.

The Bloomberg article mentions how some banks see work coming to a close while others are still ramping up. Those that are behind in their implementations won’t have time for anything else for the rest of the year and can’t even celebrate Christmas. I’m in the second camp myself and probably beyond it in a third camp that forecasts that the January deadline is the start of a process rather than the end. I think the first version of reporting in January will quickly be enhanced with additional capabilities that will aid investigation of past performance and better monitor current performance. With the pressure on compliance and trading desks, manually heavy tasks aren’t going to scale.

The whole regulation is about increasing the transparency in trading effectiveness. It is too easy to forgot this and think of it as just another regulatory tick box. However, MiFID II has direct financial impacts on commissions, spreads, and stipends. The end customers are going to want to understand the numbers and how they are being derived. Because of all this, implementing trading analytics tools that support efficient monitoring and investigation are not a nice to have, they’re a necessity.

Here’s the full article: