Achieving MiFID compliance is an interesting process. Contrary to other regulations (e.g. Capital Adequacy - Basel II) the majority of the work is not 'algorithmic' but procedural. Also, every section of MiFID compliance seems to affect operations, systems and internal controls throughout the whole institution.
Here are a two main examples
MiFID introduces some major conceptual changes in operations and these changes will require changes in attitude, behaviour and policies; a change that is far more difficult to implement than new reporting and/or changes in IT.
Client classification.
The criteria are different and the mapping is not 1-1 with the old categories. Some client will change (higher threshold) and the opt out rules are different. What is very different though is that there is a common basic criteria of classification throughout Europe, the client will be classified in the same way by all the operators in the market. Unless they opt to give up some protection with financial institution A but not with financial institution B (highly unlikely). What is more important is the need to involve clients in this process, inform them of their status, disclose best execution policy (see below) and get their proactive approval to those policies. Classification will have an impact on the execution policies and procedures and will ultimately affect the audit trail (which by the way if the institution has links with the USA and therefore is subject to Sarbanes-Oxley will require some fine tuning and checks to make sure that MiFID compliance does not throw SOX compliance out of the proverbial window).
This may also impact reference data and require changes in all the Client related software systems.
Best execution
First of all the seminal change is that best execution will not be just best value, but will be extended to highest likelihood of achieving a positive end of the trade (e.g. settlement, payment, etc.). If the trade is not with a recognised exchange or with a MTF this may require collecting some more information on the counterparty (e.g. if said counterparty fails an AML check there will be no trade), of course reasonability will prevail but you get the idea.
Multeplicity of trading venues (and the possibility of bypassing stock exchanges completely) represent the second big change, best execution policy will have to list the venue(s) normally used to execute an order for that specific financial instrument and the criteria behind the choice within those venues. I somehow assume that the majority of institution will introduce multiple venues slowly but ultimately they will (the FSA clearly mentions reasonable criteria for this). Transparency of trade requires a level of disclosure that will push them in that direction.
Best execution policy and processes must be proactively approved by clients and revised regularly, the clients need to be informed of those revision and approve them. One interpretation of the rule is that OTC instruments need to have their own best execution policy that needs be approved by the client each time, given that OTCs are by their very nature unique and tailor made.
These changes (if any) are primarily procedural, changes in procedures will drive changes in IT, relationship with supplier of market data and changes in the audit trail
These two are probably the most difficult changes to make for those institutions that were not included in the FSD and are now included in MiFID (e.g. commodity traders and a number of hedge funds).
What is even more interesting is the changes required in the Organisation Chart. There is more emphasis on the 'functional independence' of compliance and risk control and outsourcing arrangements will have to be reviewed to make sure that they meet the relevant requirements. Companies will have to make relevant adjustments to business continuity policies; risk assessment, management and mitigation policies; internal audit and administrative and accounting procedures.
All those changes will have an effect on the Operational Risk Profile of the company and therefore may temporarily impact Capital Adequacy (according to Basel II principles)
And yes... there are changes in transaction reporting as well.
All of this has to be achieved by November 1st (less than 180 working days away). Implementing Capital Adequacy criteria was faster, operationally less complex and had more time to achieve full compliance.
Here are a two main examples
MiFID introduces some major conceptual changes in operations and these changes will require changes in attitude, behaviour and policies; a change that is far more difficult to implement than new reporting and/or changes in IT.
Client classification.
The criteria are different and the mapping is not 1-1 with the old categories. Some client will change (higher threshold) and the opt out rules are different. What is very different though is that there is a common basic criteria of classification throughout Europe, the client will be classified in the same way by all the operators in the market. Unless they opt to give up some protection with financial institution A but not with financial institution B (highly unlikely). What is more important is the need to involve clients in this process, inform them of their status, disclose best execution policy (see below) and get their proactive approval to those policies. Classification will have an impact on the execution policies and procedures and will ultimately affect the audit trail (which by the way if the institution has links with the USA and therefore is subject to Sarbanes-Oxley will require some fine tuning and checks to make sure that MiFID compliance does not throw SOX compliance out of the proverbial window).
This may also impact reference data and require changes in all the Client related software systems.
Best execution
First of all the seminal change is that best execution will not be just best value, but will be extended to highest likelihood of achieving a positive end of the trade (e.g. settlement, payment, etc.). If the trade is not with a recognised exchange or with a MTF this may require collecting some more information on the counterparty (e.g. if said counterparty fails an AML check there will be no trade), of course reasonability will prevail but you get the idea.
Multeplicity of trading venues (and the possibility of bypassing stock exchanges completely) represent the second big change, best execution policy will have to list the venue(s) normally used to execute an order for that specific financial instrument and the criteria behind the choice within those venues. I somehow assume that the majority of institution will introduce multiple venues slowly but ultimately they will (the FSA clearly mentions reasonable criteria for this). Transparency of trade requires a level of disclosure that will push them in that direction.
Best execution policy and processes must be proactively approved by clients and revised regularly, the clients need to be informed of those revision and approve them. One interpretation of the rule is that OTC instruments need to have their own best execution policy that needs be approved by the client each time, given that OTCs are by their very nature unique and tailor made.
These changes (if any) are primarily procedural, changes in procedures will drive changes in IT, relationship with supplier of market data and changes in the audit trail
These two are probably the most difficult changes to make for those institutions that were not included in the FSD and are now included in MiFID (e.g. commodity traders and a number of hedge funds).
What is even more interesting is the changes required in the Organisation Chart. There is more emphasis on the 'functional independence' of compliance and risk control and outsourcing arrangements will have to be reviewed to make sure that they meet the relevant requirements. Companies will have to make relevant adjustments to business continuity policies; risk assessment, management and mitigation policies; internal audit and administrative and accounting procedures.
All those changes will have an effect on the Operational Risk Profile of the company and therefore may temporarily impact Capital Adequacy (according to Basel II principles)
And yes... there are changes in transaction reporting as well.
All of this has to be achieved by November 1st (less than 180 working days away). Implementing Capital Adequacy criteria was faster, operationally less complex and had more time to achieve full compliance.
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