Mifid II will bring a host of new challenges for both market participants and regulators, but those in the industry hoping for an easy ride, in particular another delay to its implementation, are in for a rude awakening, according to Hanks.
“This is a real deadline,” Hanks asserted. “I am sometimes asked if it is going to change again and the short answer is no. There is not going to be any legislation that pushes the implementation deadline further out, and we are expecting firms to make all efforts to be ready to comply by January 3, 2018. We recognize, however, that there is a significant challenge for firms in being ready by that deadline.”
In terms of supervising the legislation, the FCA will place significant priority on transaction reporting, which he describes as “fundamental” in terms of the regulator’s ability to keep the markets safe (orderly), transparent and reduce financial crime. Hanks also highlighted changes to best execution requirements – where firms must now provide evidence that they have taken “all sufficient steps” to achieve best execution – for special consideration.
Addressing the data challenge at the heart of the regulation, particularly industry concern over how prepared regulators are to handle the increased volumes of transaction data they will report following the implementation of Mifid II in January next year, Hanks said: “We recognize that we have more work to do in terms of ensuring that we are able to make proper and full use of that data, and to link it up with other sources of data and information in trade repositories, which will be an ongoing challenge for us. The fact that there is going to be more data puts an emphasis on us to use that data effectively.”
The FCA will utilize the data submitted to it by various required parties across the market in four distinct areas, with particular focus on transaction reporting, according to Hanks: detecting and deterring market abuse in the equities markets where there is more data available before broadening out to non-equities; supporting its work supervising individual firms to assess trading strategies and match that to data in transaction reports; analysis of financial markets and how the information may feed into FCA policies; and analysis of wider financial market stability.
There have been a large number of new platforms and compliance-related solutions rolled out to the market in recent months ahead of Mifid II’s arrival, as vendors seek to both provide firms with the tools they require and simultaneously make themselves indispensible to the market. However, Hanks reminded delegates that Mifid II is about more than encouraging additional solutions from data vendors.
“The data requirements are there to advance significant public policy goals,” he said. “People need to remember those public policy goals when thinking about their implementation and thinking about what they are doing. It is about outcomes and not just the practicalities of the data solutions that will be implemented.”
Practicalities & Accountability
While many market participants are overhauling their technology infrastructures in order to comply with Mifid II’s various tenets, the FCA is also undertaking its own technology update projects in preparation.
“We are going to be replacing our existing Zen database for transaction reports with a new market-data processor, which is going to suck in information from transaction reports but also play a broader role in relation to information under Mifid II,” Hanks explained. “We’re going to use it to take in information for transparency calculations, calculations around the double volume cap, and for reporting around quality in derivatives.”
The European Securities and Markets Authority (Esma), for its part, also has a “significant amount of work to do,” both in terms of its technology and its capacity to manage data, according to Hanks. Esma is also reliant on the work done by the relevant competent national authorities, such as the FCA, he said.
Accountability for the way in which implementations occur is also a key theme for the FCA, says Hanks, pointing to the introduction of the Senior Manager’s Regime in March last year. “Senior management have to take a lead in terms of the culture within the firm and the approach to implementation,” Hanks said, rather than just treating Mifid II as a box-ticking exercise.
However, he was quite to add, that the regulator will not take enforcement action against those firms that are able to demonstrate “legitimate assumptions or legitimate attempts to comply with the spirit of the legislation.”