Increased regulatory consensus means firms can find synergies where MiFID II/ MiFIR overlaps with other rules, but data managers should not expect the implementation of OTC product codification to be trivial. Chris Johnson, Senior Product Manager, Market Data at HSBC Securities Services.
2015 marked the coming together of a number of different regulations. Regulators have been increasingly seeking consensus—for example, the EU’s European Market Infrastructure Regulation (EMIR) and the US’ Dodd Frank Act (DFA) are aligning their rules for exchange-traded derivatives. The International Organization of Securities Commissions (IOSCO) recently got involved in that initiative and is working with the International Swaps and Derivatives Association (ISDA) on the standardisation of derivatives, which is a positive move. Leadership in this area is very welcome.
During the summer, the derivatives industry gained increased clarity over how MiFID II / MiFIR will affect firms right across the buy and the sell side, and how it compares with other regulations. As the regulations come together, it is possible to see where the similarities and differences lie. Some may ask for similar content, but there remain a lot of complexities in terms of implementation—for example, with the legal entity identifier (LEI) initiative. Preparing for MiFID II / MiFIR will be a big priority over the next 12 months.
“As the regulations come together, it is possible to see where the similarities and differences lie. Some may ask for similar content, but there remain a lot of complexities in terms of implementation.”
MiFID II / MiFIR Brings Raft of New Extensions
Top data concerns for 2016 include the extensions needed to support MiFID II and MiFIR. International Securities Identification Number (ISIN) and Classification of Financial Instruments (CFI) codes are being extended out to include exchange-traded and OTC derivatives. From the trading venues point of view, other extensions to watch include issuer legal entity identifiers, issued share capital and the new ISO short name. These are still being extended—none are fully formed. The supply chain is complex and the asset owner that needs to do the reporting is dependent on quite a few different steps to be in place, so participants need to focus on these developments, and not just assume it will be a matter of plug and play.
On the asset pricing side of things, the extension of central counterparties for OTC derivatives, and the potential use of prices that are produced by the CCPs, the consistency between them, and the extent to which they can be used within the valuation process, will all be areas of focus in the coming year.
Evidence-based Reporting
Firms will need to look at the big picture and think about how MiFID II and MiFIR can be joined up with other regulatory initiatives. It doesn’t make sense to have separate silos to handle reporting for EMIR, DFA, Alternative Investment Fund Managers Directive (AIFMD) and Solvency II for insurance. MiFID touches on all these areas, so it makes sense to join them together and find common areas to make reporting more efficient. This is one of the key challenges firms need to address.
Regulators now want evidence-based reporting, and there are a lot of changes that need to be made in order to be able to provide the kind of evidence they need. Firms need to take practical steps to make sure their obligations can be met, and that they have an appropriate audit trail showing the attempts they have made, so that in case there are any issues in the future, they can show they made every reasonable effort to comply.
Call to Action for Data Managers
Heading into 2016, data managers should not make any assumptions about new regulations—they need to assume there will be a lot of work to do. They should expect a heavy burden, and do their testing as early as possible so that if there is a problem, there will be time to do something about it. Data managers need to get on the phone to their suppliers and go through the requirements with them to make sure everything is ready. The supply chain will respond if they receive calls from lots of people. It’s not enough to have just one or two voices.
“Everyone is in this together—either everybody wins, or everybody loses. Regulators want to see consistent information—it might not feel natural for participants to collaborate with one another, but in this area it is essential.”
Collaboration across the industry will be key to seeing these initiatives take off successfully. Even large institutions need to work together to make the changes happen, due to the large numbers of dependencies. Data managers need to speak regularly to their peers, competitors and clients about common challenges, and not treat this like a prized secret. Everyone is in this together—either everybody wins, or everybody loses. Regulators want to see consistent information—it might not feel natural for participants to collaborate with one another, but in this area it is essential.
* HSBC Securities Services offers institutional investors a wide-range of services, including global custody, direct custody, fund administration, global distribution support, transfer agency, investment operations and middle office services.
Watch the video interview with Chris Johnson here.
