The Impact of MiFID II on Data Management
Recently, the revised Markets in Financial Instruments Directions (MiFID II) launched in the EU. The sweeping regulatory changes will impact transaction reporting on all financial instruments traded in Europe and affect all U.S. firms that do business with European counterparts or customers. Firms will face new requirements in tracking data—including emails, texts, and documents related to every transaction—and will need to be able to quickly reconstruct trades and search across data silos, presenting a significant challenge. Here, Ken Krupa, CTO at enterprise database company MarkLogic, discusses the impact to U.S. firms, and how new regulations underscore the importance of increasing transparency, consumer protection, and data integrity.
MiFID II addresses the integrity and fairness of European markets. It impacts transaction reporting on all financial instruments traded in Europe—stocks, bonds, derivatives, and more—as well as post-trade transparency and real-time data delivery. The broad idea is to make the markets more competitive, transparent, and fair to investors, while helping prevent future financial crashes and protecting everyone involved.
MiFID II is designed to harmonize regulations for investment services, securities trading, and processing. The rules have broad reach. Among other things, they require firms to more completely track trades throughout the trade lifecycle so that regulators can more easily reconstruct them if something goes wrong. This includes pre-trade and post-trade activity as well. The goal is to provide more transparency around trading and prices. Additionally, MiFID II specifies a requirement around what is called research unbundling, which forces fund managers to pay brokers and banks separately for research and trading services to help avoid conflicts of interest. In terms of data governance and compliance readiness, it also requires better execution with a specific need to be able to reconstruct past events and provide all types of communications related to a transaction.
MiFID II affects firms involved in virtually all aspects of trading within the EU, including banks, institutional investors, exchanges, brokers, hedge funds, and high-frequency traders.
The rules affect nearly all major U.S. banks, since they have substantial operations in Europe.
Europe harmonized rules for stock trading in MiFID I in 2007. In the wake of the financial crisis, even those rules were found to be lacking in some areas. MiFID II builds on MiFID I and extends to a broader range of market participants, execution venues, and financial instruments. Many of the new rules, such as those requiring brokers to store recordings of telephone calls, are designed to give regulators more information to reconstruct events. MiFID II also requires far more data collection. For instance, it demands 50 more data fields to be completed for transactions.
Financial firms are building new data-reporting systems to deal with MiFID II. Some trading desks will have to rethink the way they do business. Employees will need to be educated on compliance. Systems that firms have been using for years may need to be updated or replaced.
The volume of data that needs to be recorded makes the regulation a huge technology challenge. Many companies are finding that they have to update their technologies, infrastructures, and data management processes. To be compliant, firms need transparency and the ability to maintain a consistent view of the trade landscape at any point in time. All of these requirements will have a broad impact on data management and IT infrastructure, in large part because the old ways of dealing with data are no longer sufficient. The evolution of the IT infrastructure in the financial services industry has led to proliferation of systems and fragmentation of data.
