MiFID I: ToGo-LiveAndBeyond. Integrity. Excelence. Results. DeliveringMiFID Icompliance, avoidingregulatoryentropy andbuildingplansforbrexit.

Transkript

1 MiFID I: ToGo-LiveAndBeyond DeliveringMiFID Icompliance, avoidingregulatoryentropy andbuildingplansforbrexit. 18July Integrity. Excelence. Results.

2 Contents. Introduction. 3 TheFinalApproach:6MonthsToGo-Live 4. PostGo-LiveProjects.. 5 RegulatoryEntropy-PreventionStrategies MiFID IandBrexitReadiness 6. 7 Summary. 8 AboutCitihubConsulting. 9 AboutTheAuthor BobMudhar,Partner,CitihubConsulting LeadingCitihubConsulting sregulatorypractice,bobisaseniortradingsystemsandregulatorytechnologistwith morethan20years experienceinbluechipinvestmentbankinginstitutions.hiscareerhasspannedavarietyof businessfacingtechnologyroleswithastrongetradingandregulatoryfocus. CitihubConsulting smifid Ipracticenow supportssevenactiveclientscoveringfifteenactiveengagementswith projectsasdiverseasresearchunbundling,wealthmanagementandalgotradingobligations. 2

3 Introduction AsweenterthefinalsixmonthsbeforeMiFID Igoeslive,mostfirmsarebusy executingprogrammesofworktoachievecompliance.however,few wilachieve 100% compliancebygo-liveandmostareconsequentlyprioritisingactivities.with thefocusclearlysetoncompliance,citihubconsultingbelievesthatitistimeto beginevaluatingandplanningfortheperiodafterthe3rdofjanuary2018-bothin thecontextofmifid IbutalsotheUnitedKingdom sexitfrom theeuropeanunion. Inthispaper,weconsiderthreeareasandrecommendthatdecisionmakersshould planforcontinuedinvestmentandresourcinginmifid Ipostgo-live: 1.Closingofcompliancegapsasquicklyaspossibleandthecompletionof supportingworkstreams; 2.Implementingcontrolframeworksandstrategiesforminimisingtheriskof regulatoryentropy; 3.TheclosecorelationbetweenMiFID IandBrexitplanningprojects. 3

4 TheFinalApproach:6MonthsToGo-Live MiFID Igoesliveonthe3rdofJanuary2018.AsalMiFID Iprogrammemanagersknow,thisvery publicdeadlineisproceededbyasuccessionofinterim deadlinescoveringinternalsystems changes,venueupgrades,anddatacolectionforpostgo-liveregulatoryreporting.clientsmust registerlegalentityidentifiersand somere-papering maybenecessarybeforetransaction reportingorordersubmissionattradingvenuescanbegin.selsidefirmsmustfulyprepareand testhftapplicationsandcompletemarketmakingregistrations.forsomebuysidefirms,it might,dependingontradingpaternsasindicatedinthelatestesmaqaondeaandhft,be necessarytoregisterasaninvestmentfirm.acrosstheindustrytheimpactofmissingdeadlines wilbefinesandpublicadmonishment,andmayalsoimpacttheservicesafirm mayofer(for exampleifamanufacturercannotmeetcostandchargingobligationsthenthedistributormust withdraw theproducts). AMiFID Icomplianceprogrammewilmostlikelyhavemanyworkstreamswithtightlycoupled interdependencies,andbereliantontime-pressureddeliveryresourcesthataresharedwithother projects.toachievetherightoutcome,citihubconsultingrecommendscentralisedcommand andcontrolbasedonasingleplanofdeadlinesandwithaldependencies(internalandexternal) builtintoasingleenterpiseroadmap.independentexecutionofworkstreamsincreasestherisk ofmissingdeadlinesorcreatingpinchpointselsewhere. Forfirmsthatwilnotachieve100% compliancebythe18thofjanuary2018deadline,dificult decisionsmustbemadetodetermineprioritiesinsuchawayastominimiseriskandpotential impact.asingleroadmapwilhelpprogrammemanagerscommunicatecompliancegapsto stakeholdersandsecuretheirsignof/acceptance. InInrecentmonths,CitihubConsultinghasobservedthat,asthefocusshiftsfrom planningand intodevelopmentandtesting,workstreamsareoftenunderresourcedorunder-skiled.some firmshavemadeexcelentuseofcommoditydevelopmentandtestingresourcesmanagedbya smalteam ofmifid ISMEs.Thisapproachhastheclearbenefitthatitiseasiertoretainasmal numberofexpertswith indemand skilsratherthanbuildingdependenciesonlargenumbersof developmentandtestingresourcesorexpectingthem toacquiredeepmifid Iskils. 4

5 PostGo-LiveProjects Intheperiodaftergo-live,firmsshouldconsiderthenecessarystepstoclosegapsandstart buildingaframeworkforongoingcompliancewithmifid I.Fundingandresourcingshouldbe maintainedataleveltocompleteactivitiesthatwerede-prioritised.examplescouldinclude: MiFID IPostGo-LiveProgrammeCompletionProjects Area Traceability Completion InitialPeriodic Reports SIRegime AlgoStress Testingand Annual Self-Assessment FastTrack MissedBusiness Activities Operational Uplift PostTradeCosts andcharges DataCapture Description Fuldocumentationoftraceabilityisneededfrom raw text,rulealocation,rule interpretation,businessrequirements,solutionanddatarequirements,textplans andreleaseplans.internalauditandregulatorswilusethistounderstandhow decisionsweremade.thiswilform avitalpartofthefirm sinstitutionalmemory whenindividualsmoveontootherroles.traceabilityisoftende-prioritisedas workstreamsfocusonimmediatecomplianceobjectives. Preparingandsendingthefirstreportsforbestexecution(Top5venues;Qualityof Executionreport)requirescloseinspectionofdataqualityand theimmediate resolutionofissues.datacolectionbeginsatgo-live(andbeforethetop5venues report).thefirstreportswilrequireverycloseatentionatatimewhenmanyfirms plantorealocatemifid ISMEsanddevelopmentresources. LiveinSeptember2018.Staticdata atthecounterparty-by-instrumentlevelwilbe neededtotradereportunderthesiregime. Mustbecompletedwithinayearofgo-live.Ensuringaconsistentapproachto stresstestingandautomatingasmuchoftheannualself-assessmentaspossible wilbeimportanttomaintenance.few (ifanyfirms)wilhavethisreadyforgo-live. However,theefortinvolvediseasytounderestimateiftheresponseisambitious. ThereislitleESMAguidancetothecompositionoftheself-assessment. Some businesses and some activities within businesses may have been deprioritisedoroverlooked.whilstthesegapsareinevitable,achievingcompliance mustbeapriority.asuccessfulapproachforotherregulationshasbeentodeploy ateam ofdedicatedmifid ISMEsasfirstresponders. EngagementwithProductionServicesteamsisoftenoverlookedduringexecution. However,aftergo-live,theseteamsform thefrontlineofregulatorycompliance. Educatingsupportteams,implementingspecificMiFID Ioperations,controland resolutionpoliciesandprocesseswilaltaketimeandefort.escalationprocesses (thatmay ultimately lead to competentauthority notification)need careful consideration. Twocostsandchargesdisclosuresmustbeconducted.Ex-Anteorpre-tradeand expost,onceayear(minimum)ofactualcosts.itwilbenecessarytoestablish businessrequirementsandidentifyhow dataiscapturedandstored.ex-postdata colectionmustcommenceinjanuary

6 RegulatoryEntropy PreventionStrategies Postgo-live,itiscrucialthatnew projectsandbauactivitiesdonotresultinthecreationofnew compliance gaps.citihub Consulting recommends proactive compliance monitoring and traceability(seepriorsection)tominimisetheimpactofregulatorinvestigations,andtoenable thebusinesstofocusonrevenuegeneratingactivities. FocusAreasToPreventAndControlRegulatoryEntropyPostMiFID IGo-Live: Control Framework Buildingandimplementingacontrolframeworkthatensureslongterm complianceis vitalasregulatorydriftoftensetsinveryquickly.governanceproceduresfornew business activity should assess the impact of MiFID I and ensure that implementation includessuficienttime and budgetto achieve fulcompliance. CitihubConsultingadvocatesadetailedcommercialassessmentofnew business activitiestoensurefinancialviabilityandlongterm feasibilitybasedonchangesin volumes.ascompliancecostsrise,someactivitiesmaynolongerbeviable(e.g.if tradingstrategieschangeandanactivityrequiresmicrosecondtimestamping,the technologyupliftforthismaynotbetenable). MiFID Irequirestheannualassessmentofgovernanceframeworksthemselves (RTS6,Article1). Buyandselsidefirmsmustestablishacontrolframeworkthatcoverstheirspecific businessactivitiesandtheelementsoftheregulationthatapply.someaspectswil be common (e.g.the review oftransaction reporting changes formifid I compliance).otherswilbespecific(e.g.theintroductionofnew etradingbusinesses andthespecificmicrostructuralaspectsthatapply). Monitoring New businessmonitoringmustensuresiobligationsaremet,orthatthesenew activitiesdonotincreaseobligationsthatwerenotapplicableatgo-live.aspecific MiFID Icategoryofmonitoringshouldbeaddedtoalimpactedteams. Monitoringexamplesinclude: HFTmonitoringtoensureactivitiesdonottripthefirm intonew obligations.given therecentesmaq&aonmicrostructure,itmaybenecessaryforfirmstomonitor theirclients DEAflowsandalertclientswhenthesetriggerHFTobligations; Liquidityprovidersmustmonitoractivitiestoensuretheyoperatewithinschemes andagreements; Monitoring ofincidentsto determinewhich mustbereported to competent authorities; Alertingoftimesignalinteruptionsorfailures; Ensuringnew technologyinfrastructuredoesnotimpactclocksynchronisation solutions(thiscould beassimpleasan emergencyfixinstaling an outof compliancenetworkswitch). DataQuality Dataissovitaltomeetingafirm smifid Iobligationsthatnew mechanismsfor dealingwithdataincidentsandqualityissueswilbeinstantregulatoryissues.firms mustreclassifytheirdatacataloguestotagmifid Idataelements(seeCitihub Consulting smifid IDictionaryasanaidtothis). Theremustbeacontrolmechanism thatensureschangesto MiFID Itagged elementsaregivenspecifictestingandareimplementedthroughwel-definedrelease procedures.forexample,incorectcounterpartydata could resultin providing inaccuratetradereports.firmsmayneed acompleteoverhaulofdataincident resolutionslas;improvedalertingmechanismsandeveninsourcingofservices. 6

7 MiFID IAndBrexitReadiness Earlyin2016,manyMiFID IprogrammemanagerswereawaitingtheoutcomeoftheUK sbrexit referendum beforemobilisingexecutionactivities.somenow facethedificultchalengeof deliveringbothmifid Icomplianceandthebusinessrestructuringactivitiesrequiredtocontinue operations in the (increasingly likely)eventthatthe UK loses passporting rights.citihub ConsultinghaspreviouslyoutlinedwhyMiFID Iwilcontinuetobeimportantinthepost-Brexit world.itisourbeliefthatmifid Iprogrammesarebestplacedtoform thefoundationsofbrexit scenarioplanning:mifid ISMEshavedeepknowledgeoftheorganisation,recordkeeping, flowsandmicrostructuralobligationsthatwilreduceduplicationofefortanddeliveroptimal Brexitstrategies. FocusAreasAndOverlappingAreasOfScopeForMiFID IAndBrexitPreparation Area Description Client Relationships CrossBorder Analysis Theprocessofre-papering(re-contracting)andensuringLEIsareregisteredwilbea keydata pointasfirmsdetermine Brexitstrategies.Understanding legalentity structureandtransactioninterfacesisavitalstartingpointtounderstandingifthese relationshipsandinterfacesshouldchangepost-brexit. UnderstandingMiFID Icrossborderobligationswilbeessentialasfirmsdesignnew structurespost-brexit.themifid Ianalysiswilenablethetestingofthesestructures toestablishanychangesinmifid Iobligations. EntityStructures FirmsshouldensureadequatedocumentationandfactcaptureduringMiFID Iready forbrexitanalysiswork.brexitmaydemandasimplificationofentitystructure(move everythingoutsideoftheuk)oramorecomplexone(introducingnew EUentities oneormany,orreuseofexistingentities). MiFID Irequiresanunderstandingofobligationsbyentityandwhereentitiesinteract withclients,salesandtrading.itisexactlythesefactorswhichmustbeassessedas firmsdevelopnew entitystructuresforbrexit.introducinganew entityisdificultand chalenging.manyfirmshavehadtorestructurebusinessesinrecentyearsbecause itisdificulttogetright:(see:businessre-platformingblog).introducingamore complex entity structure may have cascading implications to trading venue membership,sistatusandtradereportingeligibility. Infrastructure Locations TradingVenue Memberships TorecordordersforMiFID I,andforthoserecordstobetimestampedaccurately, firmsmustunderstandtheirvoiceandelectronicflowsindetail.theseflowsare ultimatelyroutedthroughphysicalhardware.theactualclientconnectionsintofirms forelectronicflowsmustbeunderstoodincaseclientsinteractwithnew legalentities andifthenew entitieschangeorderrecordkeepingand/ortimestampingpoints. Havingafulinventoryofclientconnectionsandtradingconnectionsiskey.Brexit maybeanopportunitytoreview clientandvenueconnectivityandalsoextractsome costeficiencyasfirmslineupbrexitorganisationalplanswithupdatedconnectivity solutions seehere. MiFID IobligationsapplytoMiFID Ientitiesandtothevenuesfirmsinteractwith. Thus,havingunderstoodtheseforMiFID I,Brexitplannerscouldhaveheadstartand anopportunitytoconsolidateandrenovatememberships. 7

8 Summary Withlessthansixmonthsuntiltheimplementationdeadline,firmsmayfinditnecessary tore-planandreprioritise.werecommendcentralisedcommandandcontrol,andrisk weightedplanningofprojectobjectives. Programmemanagersmustensurethatstakeholdersarefulyinformedaboutpotential compliancegapsandtherisksofdeadlinesthatmaybemissed.werecommendasingle (enterprisewide)roadmapasatoolforefectivecommunication. Theindustryisresourceconstrainedandthispressurewilincreaseinthecomingmonths. Werecommendbuilding(andretaining)asmalteam ofmifid ISMEsthatcanmanage commoditydevelopmentandtestresourcessoastoprovidesuficientcapacity,minimise theriskgeneratedbydependenciesonbusinessalignedindividuals,andtocontain implementationcost. Now isthetimethatmifid Iprogrammemanagersandcomplianceleadersshouldbuild thebusinesscaseforpost-implementationprojects.werecommendretainingthecore MiFID Iteam untilcompliancegapsareclosedandanefectiveoperatingmodeland supportingcontrols thatfulymitigatetheriskofregulatoryentropy-areinplace. Brexitoutcomesareunknown.However,mostfirmsareplanningthetransitionofsome activitiestomainlandeuropeandarescenarioplanningforothers.werecommendthat MiFID IprogrammeteamsshouldbeviewedasafoundationalpartofanyBrexitinitiative inordertoleverageknowledgethatcoversorganisationalandlegalentitystructures, businessunitsandinstruments,recordkeepingarangements,flowsandmicrostructural obligations. 8

9 AboutCitihubConsulting CitihubConsultingisaglobal,independentITadvisoryfirm withdeepdomainexpertiseacross everylayerofthetechnologystack from businessapplicationsanddataplatformsdowntocore infrastructure.from IT strategy,architecture and solution development,through to cost optimisation,riskassessmentandimplementation ourtrustedexpertsdelivertherightresults foryourbusiness. Forusconsultancyispersonal.Wehavearelentlesscommitmenttogreatexecution,integrity andclientsuccess.weaim toredefineperceptionsofourindustryandourcommitmentto deliveringtherightresultsforourclientshasneverchanged,evenasthebusinesshasgrown consistentlyoverthelastdecades. Formoreinformation,pleasevisitwww.citihub.com ContactUs NorthAmerica EMEA AsiaPacific KeithMaitland RichardHamstead SteveRutherford 500FifthAve,Suite1610 New York,NY TheDineenBuilding 140YongeStreet,Suite200 Toronto,Ontario,M5C1X MoorPlace 1ForeStreet LondonEC2Y9DT PickeringStreet #01-64 Singapore