MiFID II: Wall Street’s Latest Regulatory Challenge
In November of 2007, the Markets in Financial Instruments Directive (MiFID) began the transformation of the European financial industry as it sought to bring stability and transparency to the markets through increased transaction reporting. In the years following, the European Commission laid down further modifications spurred forth by lessons learned from the 2008 financial crisis. The resulting MiFID II directive—in effect since January 3, 2018—is slated to become one of the furthest reaching regulatory changes to hit European financial markets in the past decade.
MiFID II expands on the original legislation and increases the scope specifically relating to the over-the-counter (OTC) derivatives market. This means that firms that were not affected by MiFID I in any capacity have seen their business models and processes change drastically as a result of the new directive. MiFID II also introduced a fundamental shift in the transaction reporting process—impacting private, investment, and retail banks, as well as asset managers and certain non-financial firms.
Increased Trade Reporting
Under MiFID I, real-time reporting  was done by trading venues and buy-side parties were not obligated to publish their trades. MiFID II shifted the reporting responsibility to investment firms involved in the transaction, with buy-side firms now sharing the reporting obligation in certain situations. Determining the party responsible for reporting often hinges on the concept of the Systematic Internalizer (SI)—firms that are deemed to fulfill a significant quantity of client orders internally are given the label. In cases where a transaction involves a single SI, that party is obligated to report. Where neither party to the trade is (or both are) an SI, the seller is left responsible. The difficulty stems from the need to quickly identify the responsible party, and to report the trading activity to regulators within minutes of the transaction.
Challenges for Investment Firms
For many investment firms in the European Economic Area (EEA), the new reporting obligations presented a non-trivial burden. The directive assumed that firms had the necessary operational processes in place to transmit their trading data to an APA  in real time. Those lacking this capability would need to have bolstered (or built) their infrastructure to handle the load—as fees for non-compliance are considerable.
A further challenge was knowing when to report, since over-reporting to the regulators carries additional fines. Investment firms could well find themselves designated as SIs for certain products while not for others. Those trading exotic products may even discover them to not yet be classified by the regulatory bodies in the EEA, thus necessitating registration prior to reporting. Such idiosyncrasies meant that every investment firm had to adjust differently to comply with the requirements of MiFID II.
MiFID II recently went live, disrupting the European and global financial services industries in an unprecedented way. Having invested the necessary efforts to proactively prepare for its sweeping changes—and remaining committed to triage and treat emerging problems—is paramount for firms to successfully manage their businesses with no disruptions or fines. Monticello Consulting Group (MCG) has assisted clients across the financial services industry in implementing the necessary infrastructure to ensure compliance and reduce regulatory risks. This experience, coupled with our in-depth knowledge of the financial regulatory environment, uniquely positions MCG to guide both large and small firms as the effects of MiFID II begin in earnest.
Monticello continues to successfully manage the testing governance for clients with compliance obligations to global regulators. Contact us today to get started.
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 Pre- and Post-trade transaction reporting (PTT)
 Approved Publication Arrangement (APA)