application design for mifid ii-compliant operations
TRANSCRIPT
MiFID II
Dr. Wolfgang Göb
Head of Business Development
Software Daten Service GmbH
Rennweg 97-99, 1030 Wien, AT
www.sds.at
Application design for MiFID II-
compliant operations
© 2015
SDS company profile
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Founded 1974, located in Vienna/Austria
Member of Deutsche Telekom Group
170 FTE
SDS solutions are built to
modernize, automate and optimize the back office processes of financial institutions.
Software Daten Service (SDS) specialises in the development of
standard software for the financial industry.
For worldwide 600+ clients, our solutions settle hundreds of millions
securities transactions per year, and serve as backbones of their back
office operations.
SDS is operating one of the largest European automated testing
centers for standard software solutions.
© 2015
Our clients
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© 2015
MiFID – the “Markets in Financial Instruments Directive”
MiFID in a nutshell
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EU affair (plus Iceland, Liechtenstein and Norway)
Published 2004, effective as of 2007
Aims towards a harmonized, competitive and accessible financial market:
− Suitability and Appropriateness
− Best Execution
− Price Transparency
© 2015
“Lessons Learned” from 2008
MiFID in a nutshell
New players on the market, new and complex instruments
Rapid technology advancement
Bundle of regulatory measures:
− EMIR (derivatives)
− MAD (market abuse)
− Basel III (capital requirements)
− MiFID II
MiFID II (MiFID II and MiFIR) published 2014, to be applied starting 2017
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© 2015
MiFID II focuses on several major areas:
MiFID in a nutshell
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Market Organisation
Transparency
Investor Protection
© 2015
Updates address weaknesses in MiFID I
Investor protection and transparency: Best Execution Policy
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Detailed provision of execution policy: “clear, easy
to understand language”
Identification of appropriate target markets for the
distribution of products
Publication of the top five execution venues of the last
year
Ongoing monitoring and communication of changes in
the execution policy
Best Execution Policy
© 2015
Strict rules on advice and granular price transparency
Investment advice and price transparency
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Independent vs. non-independent investment advice
− Declaration which type of advice is given
− Provision of details about how independent advice is achieved
− Independent advisers and portfolio managers may not accept inducements
Pre-trade price transparency:
− Breakdown of estimated fees, commissions, kick-back’s, mgmt. fees,….
- Estimates of total costs of ownership
- Inclusion of individual discounts
− May require “MiFID-II-compatible approximation” or flat fee models
© 2015
Detailed breakdown of total costs
Investment advice and price transparency
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One-off charges:
− Broker commissions, entry- and exit charges, platform fees, stamp duty,
transactions tax, FX costs...
Ongoing charges on an annual basis:
− Management fees, advisory fees, custodian fees…
− Incidental costs (performance fees)
Exit costs:
− Redemption fees, termination fees, switching costs…
To be expressed as a total amount
Granularity may be different from today’s price models
© 2015
Technical challenges
Price transparency
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Product database
Estimates and approximations for charges
Reconciliation with actual fees
Settlement and
Custody
Price Transparency
Advisory Desk
MiFID-compliant pricing information
Pre-Trade advice
Post-Trade Reporting
Product Information
Order Verification
Best Execution
Investor Profile Public Data
Private Data
Pricing
Trading
© 2015
“To monitor … the integrity of the market”
Transaction reporting
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Identification of market abuse on a European scale
Will replace existing transaction reporting regimes like §9 and WAG
Reporting of a wide group of financial instruments:
− Admitted to trading or traded on an EU trading venue. Trading venues include
MTFs and OTFs.
− Underlying instrument is traded on a trading venue
− Underlying is an index or a basket composed of instruments traded on a
trading venue.
© 2015
A new reporting regime emerges
Transaction reporting
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Reporting either direct or via “Authorised Reporting Mechanism (“ARM”)
80+ attributes per transaction (up from 20+), including:
− Identity of the customer and decision maker
− Person responsible for execution
− Algorithms used
− Flags for certain types of trades, e.g.:
- Waiver indicator
- Short sale indicator
- Commodity derivative indicator
© 2015
Technical challenges
Transaction reporting
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Massive reporting volumes
Reporting will be T+1
Full automation required
Data quality and availability
Exception Handling Validation Stage
Report Generation and Monitoring
Reporting Data Pool
ARM
MiFID-relevant Transactions Persons / Parties Data
Reconciliation
MIS Interface
Modifications /
Amendmends
XML/CSV/FpML
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Retail and universal banks are heavily affected
What is the impact?
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Processes
Back
Systems Processes
Front
Systems
Market organisation
Reporting
Investment Advice
Best Execution
© 2015
Hotspots are advisory desks and transaction reporting
Application landscape for MiFID II
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Derivatives
Customer Master Data
Transaction Reporting
Price Transparency
Advisory Desk
Product Information
Insurance Products
Securities
Orders
Transactions
Order Verification
Analytics, Management Information, Compliance Monitoring
Executions
© 2015
Pressure for an implementation start is rising
Timelines
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Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
Implementation and verification
MiF
ID I
I
Impact analysis Decision on
strategic issues
Decision on process and IT
changes
Live operations
© 2015
The next big regulatory wave
Wrap up
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MiFID II is a significant enhancement of the current MiFID regulation
− May fundamentally change business models for product sales
− Will have a significant impact on processes, applications and cost
Deadlines are tight, and immediate action is required
“Transparency is very important so that investors and
regulators are able to know the truth."