I was astounded to read about a survey from Northern Trust last week that found that 60% of fund managers have not implemented solutions ahead of MiFID II. At Citisoft we also believe that large parts of the buy-side community are dangerously lagging in their progress towards MiFID II compliance, but the survey figure from Northern Trust shocked us. It seems that some firms are still in denial over their exposure, or are hiding behind a mistaken belief that the regulation still lacks sufficient clarity.
Whilst many large European firms have had MiFID II projects running for some time, in the last few weeks we have seen the volume of MiFID II queries and interest from smaller and non-European firms rise dramatically as more realise that they are going to be impacted by the MiFID II obligations. These impacts will vary according to the type of firm and its business and operating models, but also according to the element of the legislation that is being scrutinised.
In many areas the regulation is not prescriptive about how the firm will operate but rather sets out clear principals that must be followed. For these elements of MiFID, buy-side firms will need to assess the regulation and consider the options available to ensure compliance. It will not simply be a case of buying a system or service to ensure compliance, but will need clear business decisions to be taken first.
The unbundling of broker research costs from other sell-side services is a good example of how the regulation is not prescriptive. Here, MiFID II specifies the need for greater transparency on how research is bought and funded. It does not, and cannot, detail how the market will adapt to reflect these changes.
Large parts of the regulation are aimed at the sell-side. Given its scope and size, it is critical that investment managers undertake an initial analysis to identify the relevant areas and plan accordingly. For most firms this is likely to include, transaction reporting; commission management; trade reporting and post-trade transparency; OTC derivatives; and best execution. The impact of MiFID II will also depend on the business and operating model that a firm deploys.
The important point to recognise at this juncture is what elements of MiFID II will affect your firm and which areas will not – then focus. MiFID II is such an extensive piece of regulation and the deadline is so imminent that there simply isn’t time to tackle the entire scope. It will also be critical to use resources that are familiar with the challenge; there is no time for companies now to address this issue on a part-time basis or from a standing start.
Even if the Northern Trust findings were slightly skewed, it does indicate the scale of work to be undertaken. The challenge to find and secure MiFID II expertise is likely to get harder by the week, as the talent war intensifies. Those who continue to procrastinate will find the cost and challenge of compliance rising significantly. It is critical that firms invest in understanding their exposure and ensure they have the right level of resource in the specific areas that matter.
This article was first published in FTSE Global Markets.
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