Preparing for MiFID II

Guest blog post by Tony Virdi, VP and Head of Banking and Financial Services Practice for the UK and Ireland, Cognizant

Since the Markets in Financial Instruments Directive (MiFID) was enforced back in November 2007, the economic landscape has changed dramatically. Regulators and the G20 are now demanding better execution, greater transparency, risk management and regulation of more opaque markets. To meet these demands, the European Commission (EC) released MiFID II in October 2011.

MiFID II will involve the addition of previously unregulated organised trading facilities to the MiFID framework, new safeguards for algorithmic and high-frequency trading activity, additional supervision of derivatives markets, and more stringent portfolio management requirements. Moreover it will introduce measures to protect investors. 

While not yet passed as legislation, MIFID II will require significant change for financial services firms in terms of both internal infrastructure and day-today business processes. The EC’s own estimates for one-off compliance costs for MiFID range between €512 million – €732 million with on-going costs of between €312 million – €586 million.

In addition to the financial burden, companies need to ensure they are meeting quickly changing regulations. IT plays an essential role in allowing this to happen smoothly. Businesses must think carefully about how they work with their technology teams when implementing these adjustments across the enterprise. 

Regardless of any anticipated changes, the focus needs to be on enhancing the processes and systems for electronic trading, risk management, transparency and transaction reporting (across more asset classes), compliance and investor protection. Another consideration is around data consolidation and dissemination. The reporting, publication and consolidation of trade data needs to be addressed due to problems with its formatting, cost, quality and reliability, with many issues highlighted by the European Commission.

The sell-side firms in their capacity as liquidity providers arguably have one of the biggest challenges to overcome. They will need to reassess their service strategies in attracting buy-side clients and adapt their systems quickly in order to adhere to the transparency and reporting regulations. Also, since MiFID II’s focus is on breaking the vertical integration to increase competition, sell-side firms can no longer hope to sell exclusive, fully integrated investment services to clients, which could significantly change their business model.

The full impact of MiFID II can only be ascertained once the legislation is fully in place. Forward-thinking firms will use this opportunity to upgrade their IT infrastructure and ensure a flexible approach to take advantage of the market benefits MiFID II could bring.