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What are the MiFID II data architecture requirements?
11/08/2017
What are the MiFID II data architecture requirements?

Brace yourself! MiFID II is coming – less than four months are left. By now, let’s take a look at MiFID II data architecture requirements.

11 August, AtoZForex – MiFID I stands for Markets in Financial Instruments Directive (2004/39/EC), which has been applicable throughout the European Union since November 2007. The regulation aims to create a single financial market within the EU and thus ensures harmonized protection of the investors across its territory.

In October 2011, the initial directive was revised. Nearly three years after MiFID II and MiFIR (the Regulation on Markets in Financial Instruments) were adopted by the European Parliament. The announcement was published in the EU Official Journal on 12 June 2014.

The European Securities and Markets Authority (ESMA) has announced the application date for MiFID II data architecture requirements – January 3, 2018. This causes a boom in the financial world.

MiFID II data architecture requirements

MiFID II will raise the bar on market transparency. Now, transaction reporting is necessary for all financial instruments on a T+1 basis, with one big distinction: while MiFID I focuses on 20 fields, MiFID II increases the number to 65. This creates enormous data management issues for investment managers and will cause inconveniences for both buy-side and sell-side firms.

The MiFID II data architecture requirements will reach almost in every corner, starting from trade order and execution management systems (OMS/EMS) to reference databases and legal entity identifiers (LEIs). Seems like the companies will have to find the ways to gather the data from different sources. This is the only way to provide a comprehensive disclosure to both regulators and clients.

Furthermore, investment firms will have to comply with RTS 28 —ESMA’s best execution quality disclosures: they will have to report on trading volumes of executed orders for each class of financial instruments. However, it is applicable only to top-five execution venues.

Areas most affected by MiFID II are as follows:

  1. Data management;
  2. Data sourcing;
  3. Publication and distribution of data;
  4. Non-equity instrument data.

The firms will also have to comply with toughest requirements for Instrument classification, currency codes, International Securities Identification Numbers (ISINs) and IENs. That’s one of the main challenges – the firms will have to create ISINs for OTC derivatives.

The changes are ahead – the companies will need to modernize their data management operations to correspond to the new requirements.

Changes and challenges of MiFID II

WIth MiFID II, the European Commission expands its regulations to coverage of non-equity instruments, including fixed income, swaps and derivatives. Besides, the requirements to report now extends to trading venues, not just the regulated markets as it used to be.

The main challenge for firms becomes the renewal of data management systems. The information will have to be recorded not only from electronic trading activity but also from over-the-counter (OTC) trading activities and voice streaming.

Knowing this, Credit Suisse’s management is concerned with the potential ways to record a trade submitted by the phone. Right now it is clear that there is a need for a new approach with modernized data capture systems. The instruments will also become more complex and diverse because of the dramatic increase in data volume.

One big change happened in the requirements for venues. In the past, it was sufficient that the sell-side was reporting to regulators, while buy side stayed aside. But now comes the time when the sell side has to describe the instruments it uses on a trading venue. The only question is whether there’s a need to report on instruments which are declared to trade, but not traded.

MiFID II impact

The adoption of a new regulation will lead many firms to reassess the existing data management architecture. Some experts are confident that now there’s a need for holistic data management architecture which connects several systems such as:

  • OMS/EMS
  • Regulated markets (exchanges)
  • MTFs
  • OTFs
  • Systematic Internalizers
  • LEIs and know your customer (KYC)
  • APIs
  • Possibly Consolidated Tape Providers.

Beate Born, global MiFID II trading project lead at UBS, points out, the solution “is to simplify data usage and try to take the complexity out it.”

Apart from challenges, it is also worth to take a look on MiFID II as a business opportunity. From this perspective, financial firms may take the new regulation as a driver for innovation. One may look at it as an incentive to reconsider and improve an existing business model. After all, the purpose of the regulation is to bring a maximum benefit to the customer. And that’s exactly what each and every business should do – put the customer first.

Think we missed something? Let us know in a comment below.

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