AIFMD,AN ALTERNATIVE TO MIFID II
OBJECTIVES OF MIFID
The Markets in Financial Instruments Directive 2004/39/EC (‘MiFID’) provides harmonised regulation for investment services across the 31 member states of the EEA (the 28 EU member states plus Iceland, Norway and Liechtenstein). The directive’s main objectives are to increase competition in investment services, reduce systemic risk to the markets and strengthen investor protection. MiFID came into law on 1 November 2007. While MiFID did succeed in some of its objectives, weaknesses in MiFID’s structure became apparent during the financial crisis in 2008.
Following the financial crisis in 2008, EU policymakers began to review and update MiFID with the aim of increasing market stability, confidence, and to bolster consumer protection.
MiFID II represents a major overhaul of the existing law, building on and extending the scope of MiFID. The original MiFID sought to remove barriers to cross-border financial services within the EU with the aim of creating a safer, more transparent and evenly balanced marketplace as a whole. Extending the transparency requirements, MiFID II will have an even more pronounced impact across the EU investment business landscape. It will affect those engaged in the dealing and processing of financial instruments, from business and operating models, systems and data, to people and processes.
Undoubtedly, the effect of MiFID II will be felt heavily by market participants.
THE COST OF MIFID II – TRANSACTION REPORTING
There is perception in the investment business sector that the cost of MiFID II implementation will be high and the principal reason for the increase in cost is transaction reporting. MiFID II encompasses a greater number of financial instruments and affects a wider group of financial service companies than MiFID. MiFID provided that investment firms could reasonably rely on a third party to make reports on their behalf. This exemption is only partially carried forward to MiFID II.
In addition to the challenges of transaction reporting, there is the problem of handling the data itself. Many investment managers will struggle with centralising their transactional data. Banks and larger managers are likely to have multiple front and/or middle office systems, however, this will not be the case in respect of smaller managers.
The transaction reporting requirement under MiFID II is to report up to 81 fields ranging from transactional economics to the buyer and seller’s personal information (eg name, age and national ID or passport). In addition, a complex set of rules is to be applied to determine which transactions are in scope, and in which format they are to be reported to the relevant competent authority. This is in comparison to 24 fields that are required to be reported under MiFID. The transaction reporting requirements are substantial and they represent a material increase in reporting requirements from MiFID. To further exasperate the matter, trades must be reported no later than the close of the following working day to the relevant national competent authority (ie within 24 hours). To put it into context, ESMA’s guidelines for ‘Transaction reporting, order record keeping and clock synchronisation under MiFID II’ is 289 pages long1
and
includes guidance as to how to deal with leap seconds and as to which satellite to synchronise clocks to (including the Russian GLONASS or European Galileo satellite system).
1
https://www.esma.europa.eu/sites/default/files/library/2016-1452_guidelines_mifid_ii_ transaction_reporting.pdf
26 | ADMISI - The Ghost In The Machine | November/December 2017
MIFID II ENCOMPASSES A GREATER NUMBER OF FINANCIAL INSTRUMENTS AND AFFECTS A WIDER GROUP OF FINANCIAL SERVICE COMPANIES THAN MIFID.
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