The Markets in Financial Directive Instruments Directive raises the heat to new levels on financial institutions in Europe with a little-hyped Article 51 that says regulators in Europe will have the right to reconstitute the key stages of the trade for each transaction.
According to research by the JWG-IT Think-Tank, 64% of financial firms identified that they have a problem with the Article 51 requirements, as they cannot reconstruct events after the fact in reasonable timeframes or cost levels.
Under Article 51 the firm must prove that their actions conformed to what they said that they would do, and that they were unable to manipulate any of the information around the trade for five years. Furthermore, it says that customer records that set out rights and obligations shall be retained for the lifetime of the relationship with the client. The deadline for EU/EEA financial firms to comply with MiFID is 1 November, in what is expected to be one of the largest compliance issues the financial sector has seen in a decade.
If record-keeping is done incorrectly it could falsely trigger or hide market abuse issues: “If you get caught out with it wrong, it could cost you hundreds of thousands of euro in fines. You now need to know more about the quality of the bullets in the gun you have handed over. If what you have given to the regulators, the market and your customers does not match what you hold internally for up to five years from 1 November you are exposing yourself to new risks. Record keeping is a big problem and we are working with the industry to make senior management more aware of their new responsibilities under a principles based regime.” says PJ Di Giammarino, CEO of JWG-IT.
The JWG-IT TechSIG, has identified 10 record-keeping scenarios to test a firm’s overall record keeping operating model readiness. Firms need to be able to demonstrate:
1. That they are capturing all customer classification information across all communication channels including print, SMS, IM, e-mail, phone and mobile.2. Non-preferential treatment and best execution according to specific instructions for complex products was given.3. Management review and supervision of non-structured and structured deals occurred. Keep order book data for best execution purposes by timeframe, including market context, algos, policy and pre- and post-trade analytics formulae.4. What happened, even if they no longer license a third party application and therefore cannot access the application logic or data.5. That all communications, including promotions and research, with clients was “clear, fair and not misleading.”6. That what was sent to regulators and the market matches their internal systems.7. That they are following your own policies and procedures (e.g. conflicts of interest, firm governance).8. Appropriate controls (e.g. escalation procedures, 4-eye / 6-eye control) of disparate information in different media and different departments were in place.9. That changes to reference data (e.g. corporate actions, instrument) can be rolled back by time including both raw and dirty data.10. That the trading environment’s policies, orders, executions, decisions, market data, responsible personnel and reference data can be rolled back in time.
It is clear that firms still have a lot of work to do, and as PJ Di Giammarino keeps saying, “MiFID is a marathon not a sprint.”
PJ Di Giammarino, CEO, JWG-IT and Phil Higgins, CEO, Brookcourt will participate in a keynote on how MiFID will impact on data storage at 10:15 on 17 Oct. at Storage Expo 2007.