White Paper. MiFID: How to deal with 4 Critical Reference Data Issues. Executive Summary

Transcription

1 MiFID: How to deal with 4 Critical Reference Data Issues Executive Summary The aim of the Markets in Financial Instruments Directive (MiFID) is simple: to allow financial services institutions in the EU to provide their services across borders, while increasing transparency and investor protection for retail and institutional customers.its execution is far more complicated however, involving significant detailed requirements that will affect: Organisation and conduct of business of investment firms Operation of regulated markets New pre- and post-trade transparency requirements for equity markets Creation of a new regime for systematic internalisers of retail order flow in liquid equities More extensive transaction reporting requirements. In short, MiFID is designed to uphold the integrity and overall efficiency of the European financial system in a competitive global market. As a result of the emerging regulatory framework the extensives changes surrounding the way data is gathered, managed, shared and retained will have significant impact for both buy side and sell side firms. This paper sheds light on some of the data issues stirred up by the MiFID revolution and suggests four pragmatic ways of addressing those needs. February 2007 MiFID 4 Critical impact areas 1

2 The European Union Landscape - Jan Countries (including Bulgaria and Romania) 21 Stock Exchanges 26 Derivatives Exchanges 4,700 (approx) investment firms 50 % plus on the buy or investing side Introduction Much has already been written on the profound impact that MiFID will have on the securities and investment management landscape throughout the European Union. This paper does not seek to add to the volume of MiFID analysis emanating from consultants, journalists and vendors but to offer a realistic and practical insight into some of the fundamental data issues that will be compounded by MiFID. The new rules are destined to affect not just an organisation s technology and processes for doing business, but also and more importantly its competitive positioning. MiFID, if implemented across European financial markets as the regulators intend, will bring about fundamental changes that will require institutions to adapt their processes, and systems to make life easier for investors. This will place huge demands on the existing data foundations of financial services firms, compounding both volume and complexity of data needs, and associated workflows. Organisations that still retain their data silo structures, especially those with little or no internal consistency of business process or data modelling across the different business units will feel the strain. Change is Certain Although it is clear that MiFID will bring about a significant restructuring of the investment environment from November 2007, many of the details and specific compliance requirements have been slow to emerge from the offices of the national regulators in consultation with CESR (The Committee of European Securities Regulators). This ambiguity about some of the expected changes has contributed to a certain wait and see paralysis by the industry at large, which undoubtedly will impact the ambitious implementation timetable. In other words not all national regulators are on target for publishing their local specifications and not all market participants across Europe will be ready to comply by the November 2007 target date. Since it is likely that a large part of the market will be slow to fall in line behind MiFID, how far and how rigorous any penalty process will be applied is open to speculation. But it is clear that MiFID will happen and it is essential for institutions to prepare themselves; failure to do so jeopardises their market position and Where does data fit in? Pre-trade price discovery; post-trade price reporting Trade & transaction reporting Unique instrument & trading venue identification Instrument type & classifications Client classification Identification of counterparties Record keeping Monitoring the universe of liquid shares Use of standards MiFID 4 Critical impact areas 2

3 possibly even their very survival. Data is one of the key areas of impact. Establishing an integrated enterprise data management platform across geographic boundaries and functions will be a pre-requisite to not only meet the compliance demands known today but also to support regulatory evolution and future customer behaviour. This paper outlines four of the impact areas and suggests pragmatic steps that can be taken to address them. Compliance comes at a Price The cost of changing existing practices is likely to be significant. MiFID covers a very wide range of business activities, including the way investment firms organise themselves, the type of business they can take on, their obligations to customers and counterparties and many other functions. While a lot of attention has gone to new operational requirements (pre- and post- trade transparency, transaction reporting, best execution) the scope of MiFID is much wider, and cannot be solved by a single software solution, or service provider. Implementing a MiFID compliance strategy will require dozens of projects across the organisation - with only a few an obvious fit for existing technology solutions. The sell side has been earlier off the mark to get ready. They have some significant customer record keeping challenges as they give their clients greater visibility over the cost of trades including their margins. Equities firms will have to bear the largest cost, but even firms specialising in fixed-income trading will need to change their systems and infrastructures to support MiFID requirements. The firms that have already invested in enterprise data, common systems and flexible architectures have the advantage that their compliance costs will be lower. The adoption of service-based solutions and architectures such as SOA are steps all institutions can take towards achieving compliance in a cost effective manner. In general, many third party off-the-shelf front and back office software suppliers are already rushing to upgrade their products to make them MiFID-compliant. A plethora of such offerings in order management, execution and settlement systems abound, but too often they do not address the data challenge at the heart of the new regulations. MiFID cannot be solved by a single software solution, or service provider Managing the Data Challenges The key data challenges presented by MiFID include data aggregation and dissemination, reference data management, and addressing the impact on information exchange standards. Market transparency is the key theme, and will provide greater opportunities for aggregation and dissemination of data. Various options will be open to market players including publishing via regulated markets, third party vendors, and proprietary means (e.g. websites). Data volume, both pre-trade and post-trade, is likely to explode putting pressure on data management processes, systems and storage. MiFID 4 Critical impact areas 3

4 The demands of MiFID in terms of how to deliver transparency, how to classify each client, each security and how to map a transaction and all the counterparties and agencies between them are challenging. Those firms that get their data needs right will have a distinct advantage. Many firms still need to define and prioritise the data issues that cross business, functional, regional and IT boundaries. Is your reference data ready for MiFID? A pragmatic 4-point checklist: Use ISO (MIC) to identify POL and POT/POQ. An instrument can no longer have a single absolute unique identifier; it is the combination of instrument identifiers (ISIN, local ticker) and entity identifiers (MIC, IBEI, BIC) to identify exchanges, depositories, systematic internalisers, and MTFs that must uniquely identify a product at a given point in a transaction cycle. This means the boundaries between security master and counterparty master are blurred and institutions need to be able to capture and analyse all the possible combinations. 3. New Counterparty and Customer Identification Requirements There are specific reference data issues that can already be addressed as part of developing a MiFID ready data management approach. The following are some key elements to consider when assessing data needs: 1. Support for Existing Reference Data Standards Identifying a financial product: A combination of ISIN, MIC and local ticker Classifying a financial product ISO (CFI) to categorise instrument types. Multiple identifier schemes per issue will be necessary easy cross-referencing of ISIN, ticker, SEDOL, Valoren and other codes is a base requirement for your security master infrastructure. 2. Ability to Combine Siloed Sets of Static Data, Linking Product with Entity Data In order to have a unique identifier the Instrument identifier needs to combine: Place of Listing (POL) and Place of Trade or Quotation (POT/POQ) Each transaction must have an identified counterparty Institutions & MTFs will have unique identifier generated by the competent authority New Client Classification requirements. MiFID establishes three categories of clients that must be used: Retail Professional Eligible Counterparties, with defined criteria for classification of clients into one of those categories. There is provision for clients to change their initial classification on request and on a tradeby-trade basis These requirements overlap with existing Know Your Customer (KYC) legislation and client-on boarding processes. Customer classification data needs to be complete and available at the point-of-trade. Synchronising these complex workflows, and integrating them into deal flow will stretch existing CRM and sales automation tools. MiFID 4 Critical impact areas 4

5 4. Trade and Transaction Reporting: granularity, format and standards Requirement to capture and normalise transactions in different formats, in real time, There are no likely suspects for transaction reporting standards (as there are for instrument and client data). Being able to report on trades and transactions in different formats, with flexible data conversion and consolidation will require a combination of middleware and data normalization model drivers. Data Architecture In addition, any integrated data architecture for the management of MiFID needs to support four requirements that lie at the heart of the new rules to achieve a level European investment playing field: Customer Order Handling being able to demonstrate best execution and transparent pricing Transparency ability to demonstrate and audit trail achievement of transparency in real time and deferred reporting that includes: market data feed pre-trade and post-trade transparency customer confirmations information access for customers submission of reports to regulators. Market Data Management As the number of venues and algorithmic trading expands, an increase in market data is also expected. With respect to trading and analytic processes, this data will drive the need for improved reference data management and scalability. Data Retention Larger amounts of market and transaction data will have to be managed under more exacting conditions of time-criticality and accountability. Transactional data needs to be stored for a minimum of five years which impacts the management, storage and retrieval of that data. This is the data that will demonstrate best practice in these areas: Correct customer treatment Best order handling, routing, clearing and settlement Handling conflict of interest. The response to these data management challenges is to architect a robust, scalable and centralised data management platform that provides a standardised approach to data management operations and financial messaging. Best Practice = EDM Essentially this means decoupling the data layer from the data source and the consuming applications and creating a data management layer where the data is cleansed, validated and enriched before being made available to consuming applications. This is known as generating the trusted golden copy of data, accessible by all departments and applications across the enterprise. A golden copy of data is the best way of consolidating and unifying all the static data about customers and their transactions, allowing this data to be modelled and used across the firm in different business processes. It avoids costly duplication, and permits a simpler and more effective centralised management of the core data as it relates to client, market and security. Any break in MiFID 4 Critical impact areas 5

6 Clients Retail Professional Investment Advice Portfolio Management Order Execution Investment Advisers Fund Managers Banks Investment Firms Member states must ensure that Investment Firms in all states are able to gain access to trading venues and clearing and settlement infrastructure without additional regulatory burnen Execution Venues Authorised Markets MTFs Clearing & Settlement Eligible counterparty Broker Dealers Alernative trading venues MTFs require regulation. Regulators workflow because of a data inconsistency could result in the competition winning the business on the grounds of better price or speed. In a golden copy data model, a bond issue can be modelled so that all the relevant data is maintained in one repository, including name of issuer, where it was issued, its credit rating, when issued, maturity date, size and tick size. For a customer, a similar master with name, account numbers, type of account, policy information etc can be maintained. In addition, a position master can identify the relative positions of a portfolio holding, what was bought and sold and to who, who the custodian is, the paying agent and all other essential information relating to the transaction cycle. By holding such information centrally and with the ability to cross-reference it, the golden copy enables immediate insight and management of potential risk situations. For instance, in the case of a credit event, the data management platform supplies the core decision support that will prevent subsequent trading in a particular security or with a particular counterparty. Equally, a pension fund may have policy limits on specific levels of exposure to a particular Practitioners groups recommended industry standards ISO Market Identification Code Specifies a universal method of identifying exchanges, trading platforms and regulated or nonregulated markets as sources of prices and related information to facilitate automated processing. ISO 6166 ISIN Non unique, issue level identfier. Format 12 digits, 1st two digits market code, 12th digit check digit ISO International Business Entity Identifier (IBEI) Currently a discussion paper. Required for counterparties ISO 9632 Banking Identification Code (BIC) Currently heavily used but may not be sufficient to to cover the required granularity to identify counterparties. MiFID 4 Critical impact areas 6

7 Timelinefor MiFID Implementation: March 2006 Local consultation on MiFID Member States write into National Law and define requirements Sep 05 Nov/Dec 05 Feb 06 Oct 06 Apr 07 Mar 04 Oct 05 Jan 06 Mar/Apr 06 Jan 07 Nov 07 Adoption of Directive prospectus documentation ESC votes on implementing measures Possible further Local consultation paper reflecting any changes Expected Implementation Date sector. The golden copy ensures the customer record will accurately reflect the consolidated exposure to a third party, instrument or sector across all business activity. Conclusion In a revolutionary way, MiFID which is scheduled to be implemented by November 2007, opens competition by introducing a level playing-field between all execution venues in the European Union and reshaping the value chain across intermediaries, brokers, data vendors and investors. This revolution makes MiFID not just a regulatory event like Basel II, a technology event like Y2K, or a market event like the Euro, but blends elements of all three into a fundamental challenge to all financial services business models. This upheaval will come at a price, but compliance alone should not be the end goal. The institutions that develop products and services to benefi from MiFID opportunities in their strategic growth plans will be the real winners. At the heart of every challenge lies the attention given to systems, processes and resources that manage the quality and reliability of data. This means creating an underlying data management platform that enables slower data churning legacy systems to mesh in with more agile responsive front office systems to create a single view without the need to overhaul the entire infrastructure. The adoption of and EDM strategy in a common data architecture enables the CIO to leverage proprietary data across all areas enabling the firm to become more responsive to changing business conditions swept in by MiFID. The larger the firm and more complex its structure the more challenging will be its data issues, and the greater threat potential to its business model. Are you ready for MiFID? MiFID 4 Critical impact areas 7

8 About GoldenSource GoldenSource delivers an integrated 360 EDM platform for the securities and investment management industry. GoldenSource makes it easy to manage critical reference and market data with Enterprise Data Management (EDM). Our innovative products create, maintain and distribute a trusted golden copy starting with the industry leading data model which covers all financial instruments, customers and counterparties, and extends to transactions and positions. The ability to connect, organize and aggregate trusted information helps our customers to achieve their business goals by reducing risk and enabling better decisions making. GoldenSource solutions are used by forward-looking banks, brokers, investment managers, service providers, and exchanges to reconcile tactical departmental goals and strategic enterprise objectives. A proven supplier of on-premise EDM solutions to the world s largest financial institutions, GoldenSource also delivers managed data services via the innovative Powered by GoldenSource program. For more information, visit: or follow us on Twitter at GoldenSource Corporation All rights reserved. MiFID 4 Critical impact areas 8