MiFID II: Unfinished Business

Blog entry

Generic data issues and specific structural issues caused by the implementation of Markets in Financial Instruments Directive II (MiFID II) continue to challenge traders and brokers, despite the regulation’s relatively smooth debut on January 3, 2018 – the so-called ‘Day of the MiFIDs’.

The pain points highlighted by an expert panel (see box) discussing the unfinished business of MiFID II at A-Team Group’s recent Data Management Summit in London, include:

  • Generic data issues such as sourcing, mapping and integrating new data required for reporting, consistently classifying data across the industry, and trying not to drown in the mass of new ‘paper’ flowing in and out of firms.
  • Specific structural issues caused by MiFID II, such as pre- and post-trade transparency, reporting to Approved Publication Arrangements (APAs) and Approved Reporting Mechanisms (ARMs), the Systematic Internaliser (SI) regime, Legal Entity Identifiers (LEIs), double volume caps and best execution reporting.

Across all these issues, the role of regulators in providing much-needed guidance and data came under scrutiny.

The Panel

- Meredith Gibson, a regulatory lawyer working at Deutsche Bank

- David Lawlor, head of regulatory products at TP ICAP Data & Analytics

- John Mason, global head of regulatory and market structure propositions at Thomson Reuters

- Irina Sonich-Bright, head of business development for the electronic trading desk at Credit Suisse

- Richard Young, an industry and regulatory relations specialist at Bloomberg Global Data

The good news, the panel agreed, was that January 3 went well. ‘Relatively smooth’, said Sonich-Bright. ‘Bit of an anti-climax’, said Lawlor. ‘Relatively quiet’, said Mason, emphasising that MiFID II implementation represented a ‘phenomenal effort’ by the industry to be ready on time, considering the regulation’s scale.

Data issues

The panel also agreed that there is no time to bask. Getting to the compliance deadline ‘wasn’t a race to the finish, but a race to the start’, said Young. And since then, the industry has hit a range of practical data management issues. Lawlor described these as ‘teething problems – fields missing and deferral periods that add complexity’. Young said: “There are daily glitches with data sourcing. That may be data from regulators or other third parties. We’re all working through this and learning as we go with the data that's being produced, and vast amounts are being produced.”

Mason also pointed to problems around sourcing and mapping data. He said: “Something like 3 trillion new data points have been introduced as a consequence of MiFID II. The industry is still wrestling with the challenges of new market structure, new reference data, new classifications, and making sure we're all referring to the same instrument using the same codification.”

Noting issues around consistency of reference data, he said: “We saw in the early stages that where we may be classifying something as a structured note, FIRDS [the European Securities and Markets Authority’s Financial Instrument Reference Data System], was classifying it as a bond. Classifications drive whether or not something is a reportable instrument. We've still got issues here and they need to be ironed out.”

One over-arching impact of MiFID II is the huge amount of new data flowing between firms, even beyond the massive repapering project that getting ready for January 3 required. As Gibson said: “The industry simply wasn't ready for the avalanche of inbound data as it was focused on getting to the MiFID II compliance day.”

More problems

As well as generic data problems, firms are dealing with a series of instrument-specific changes required by MiFID II, some of which are still feeding into the financial system. Young said: “If you look at what is still to come in terms of MiFID II implementation, we have the SI regime and the double volume cap, which weren't in place on January 3. Some best execution reporting starts from April.”

Among the ongoing challenges, Young noted the LEI, saying: “The LEI has gone into overdrive with MiFID II. Six months ago, there were 650,000 LEIs issued. Now there are 1.2 million and most of that rise is because firms have to get LEIs for MiFID II purposes.” The drive for LEIs prompted ESMA to delay their requirement until June, although Young warned: “I'm not sure it's going to be different at the end of June compared to what it was at the end of December. The June introduction of the LEI could have some negative consequences for liquidity as if you haven’t got an LEI, you can't trade.”

Mason discussed SI trading issues, saying: “We're seeing a high volume going through the SI structure. We're seeing some dataflows going out to Switzerland on dual-listed securities because SIs and equivalent exchanges aren't subject to the same tick size rule as European venues. As a consequence, algorithms are automatically routing volume into those regimes. Will the regulators make changes to get harmonisation across tick size?”

Sonich-Bright agreed that MiFID II is driving change in SI trading. She said: “Systematic internaliser activity, why is it increasing? Well, some of us have to register as a systemic internaliser to conduct simple, daily duties. It's because we're following the rules.”

She also highlighted issues around the quality of post-trade reporting data. “It's very important that post-trade transparency data is correct and understood. This is something that national authorities will definitely be focusing on. In algo trading, for example, my algo is going to look at these volumes of data and will filter out unnecessary data. For this, we need to make sure vendors provide enough tools for people to derive an understanding of the data. There’s still a lot of work to do in this space.”

Lawlor noted problems around MiFID II’s requirement to report pre-trade data. “The digitisation of pre-trade data, quotes and the like, hasn't really happened in the past. Capturing it is a cultural change in terms of the way brokers and traders operate. It is also a massive tech lift. So even at this stage, firms are struggling to put in the data and report it.”

The panel also cited data sourcing and classification issues in dealing with APAs and ARMs. Sonich-Bright raised the issue of consistency of what data APAs are publishing and making sure the data they are publishing is correct. Some APAs do not offer a cross-check of data and firms want APAs to be active here and provide some sort of data quality assessment. With ARMs, there is sometimes confusion around the use of multiple LEIs that clients send on orders. As Sonich-Bright concluded: “Some data correction will also have to take place there.”

The role of the regulators

To help the industry meet these challenges, regulatory support is vital. The panel felt regulators could do better. Young said: “FIRDS drives a lot of the transparency that MiFID II is all about. But if you don't get up-to-date files every day from ESMA, there is a knock-on effect on transparency. The operational reality is that since January, FIFDS has been a bit flaky in terms of when files might turn up.” Young credited ESMA with doing well ‘with an incredibly hard job’, but added: “There is a high dependency on FIRDS being up to date because it drives so much else. People are looking at it very closely.”

As to the future, there’s the question of when regulators will start coming after firms that fail to comply with MiFID II, and how they will tweak the regulation once they digest how MiFID II is working in practice.

Mason said: “Regulators will look at whether MiFID II is delivering what it was intended to deliver. They may look at data moving into areas they weren't expecting it to move into, lack of transparency, inconsistencies in market structure, and the fact that SIs can't quote smaller tick sizes while equivalent exchanges can. Will these exchanges be asked to harmonise tick size to gain equivalence?”

Gibson warned that politics – including Brexit – may also play a part in change. She said: “If Dodd-Frank changes, the EU will need to co-ordinate its response to that. Brexit is also going to have a profound effect. We're talking about equivalents or mutual recognition, and we don't know what that means or looks like at the moment.”

The unfinished business of MiFID II raises the spectre of MiFID III, the next ‘Hollywood blockbuster’, as Gibson put it. The audience was left to wonder whether there could be a chilling sequel to ‘Day of the MiFIDs’?