1. 1. MAKING SENSE OF MIFID II TRUSTED TECHNOLOGY PARTNER
2. 2. THE PROPOSED LEGISLATION MiFID was introduced to the European Union financial markets regulatory system in November 2007 when it became a core piece of legislation. Its main objectives were to improve investor protection, increase competition and help to create a single European financial services market. Despite the Directive leading to reductions in trading costs and faster trading times, these benefits have not always been passed on to the consumer. Enter MiFID II and MiFIR. MiFID II and MiFIR were conceived in response to the global financial crisis, in a bid to prevent future crises, strengthen the financial services market and, a key priority, to protect investors interests. MiFID II covers seven main areas, these being: n Market structures n OTC Derivatives and commodities n Authorisation and organisational requirements n Third country access n Restrictions and position limits n Transparency n Investor protection and provision of investment services this is the area that we are focusing on here INVESTOR PROTECTION RECORDING OF CLIENT COMMUNICATIONS Current FCA requirements state that a firm must take reasonable steps to record relevant telephone conversations, and to keep a copy of relevant electronic communications, made with, sent from or received on equipment that is provided by the firm to an employee or contractor; or on personal equipment which has been sanctioned for an employee or contractor to use for business purposes. The FCA states also that a firm must take reasonable steps to prevent an employee or contractor from making, sending or receiving relevant telephone conversations and electronic communications on privately-owned equipment which the firm is unable to record or copy. Records must be maintained for 3 months. MiFID II takes this further and states that all eligible firms will have to take all reasonable steps to record relevant telephone conversations, electronic communications and face to face meetings, which relate to actual or possible transactions, both for clients and on the firms own account. The records must demonstrate any terms of any orders placed and will be used to detect any market abuse. The records will need to be kept for at least 5 years. MIFID REPORT TRUSTED TECHNOLOGY PARTNER
3. 3. WHO IS AFFECTED? The list of those affected by MiFID II is significantly more comprehensive than that under the FCA and includes: n Investment firms n Credit institutions n Portfolio managers n Broker-dealers n Stock brokers n Corporate finance companies n Commodity firms n Market operators n Central counterparties n Data service providers THE STATE OF PLAY TODAY There are various ways that firms today are meeting the FCA call recording requirements, utilising current call recording technology. Many systems are unable to handle mobile call recording and in order to get around this some firms have completely banned the use of mobiles for trading. This management by policy is effective but somewhat limiting for the firm and removes a number of effective and valuable communication channels that could be delivering business efficiencies. Some firms only allow trades to take place through a trading desk. All calls made by the trading desk would be recorded and therefore compliant under current legislation. A number of firms also wrongly believed that trades which happened when traders used personal mobiles, were not covered by the legislation and they were therefore not liable - particularly if the traders had signed a declaration stating that they would not trade on devices that were not corporately owned. The onus on the recording of the calls still lies with the trading organisation who must be seen to have taken all reasonable steps. WHAT DO I NEED TO DO AND WHEN? By January 2017 you need to have put in place measures to address the following areas: MIFID REPORT TRUSTED TECHNOLOGY PARTNER Throughout 2015 - Scope the work Late 2015 - Plan your data lifecycle Early 2016 - Gap analysis Mid 2016 n Data will need to be retained for 5 years, so plan the lifecycle of your recorded data carefully to ensure it is being stored on the most efficient media and that you can retrieve it simply and quickly. n Investigate storage management software that can automate the movement of your data through its lifecycle. n Evaluate the software tools that are available to record all relevant communications. Can your current infrastructure house the data that is generated, or would a cloud based solution better meet your needs? n Test your chosen solution and go live by late 2016 to ensure that you are meeting regulations by January 2017. n Calculate the employees that will be affected by the legislation, the number of communications that you will need to record on a daily, weekly, monthly, yearly basis and estimate the total size of the data set based on average fie sizes. n Establish a set of new policies and procedures that will be needed to accommodate the recording process.
4. 4. KEY CONCERNS The scope of the legislation regarding communication recording is vast. There is a common belief that the MiFID II telephone recording requirements will be very expensive to implement with costs likely to significantly outweigh benefits. There are cost effective call recording solutions available which also cover mobile and electronic communications. Many companies expressed concern about the sheer volume of communication that would need to be stored. The regulations effectively cover all of an organisations calls and seemingly rule out compression of the files. Internal storage systems are unlikely to be able to cope with the volume required. One route forward might be to only keep the most recent records on site and to back up historical data to a secure cloud server. Cloud storage from the outset is another solution. Traders receiving emailed sound files of their own calls on request could also cause an organisation network storage issues. Many firms have expressed their concerns that MiFID II is lacking detail and clarity in terms of the correspondence that is to be recorded. This is outlined as: reception and transmission of orders, execution of orders on behalf of clients, and dealing on own account. The specific conversations and communications that should be recorded in relation to these investment services are: (i) the receipt of an order from a client; (ii) the transmission of an order (both where the investment firm will transmit the order, and where it will execute it); (iii) the conclusion of a transaction when executing orders on behalf of clients; and (iv) the conclusion of a transaction when dealing on own account regardless of whether a client is involved in the transaction. Regulation and transparency versus business efficiency and investor protection. The regulations have a stated aim to safeguard and protect investors. But any systems put in place must enable traders to continue to act and respond to market conditions quickly that is also in the interests of investors. The removal of the exemption for discretionary investment managers to record calls looks likely to place a considerable burden on smaller firms. Questions are raised as to why this exemption is being lifted, other than to ensure regulatory consistency. From a consumer and investor perspective, the blanket call recording requirement will be beneficial, allowing the regulatory bodies to assess firms compliance and identify cases of market abuse. MIFID REPORT TRUSTED TECHNOLOGY PARTNER
5. 5. THE NEXT STEPS It is clear that firms must take action if they are to adhere to MiFID II and MiFIR when they come into play in January 2017. The current policies of banning trading via mobile phones will not cover those conversations which are related to trades, but do not directly result in a trade. These conversations must be recorded under new MiFID II regulations. To ban the use of mobile phones altogether is not a practical step in todays environment, and would prevent home or remote working, which would surely result in a loss of productivity and difficulty in recruiting and retaining employees. As the regulations state that all communications must be recorded, it makes sense to look at an holistic set of solutions which would cover email, web based applications, instant messaging, mobile conversations, voicemail, landline and face to face meetings. There are solutions available, including Voxsmart, which can do all of these at a price point which is not prohibitive. The cost can also be offset against predicted savings that can be brought about by avoiding legal costs associated with disputes, or HR cases against employees. FUTURE ROUNDTABLES For those who attended, we hope you found the event useful and informative as a discrete forum to ask questions, raise concerns and issues and seek advice from your contemporaries. We are planning on holding roundtable lunches on a Quarterly basis and would welcome your suggestions on topics that interest you. To submit an issue or topic for discussion, please email marketing@rfa.com MIFID REPORT TRUSTED TECHNOLOGY PARTNER CONTACTS Oliver Blower is the CEO of VoxSmart and is a highly experienced financial technology executive with a strong background in leading high growth businesses. Oliver has spent the last 5 years building derivative clearing businesses within Tier 1 Investment Banks in response to the regulatory reform of global Capital Markets. A qualified lawyer, Oliver is well placed to provide advice and guidance on the regulatory challenge that faces financial services firms today. E Oliver.blower@voxsmart.com T +44 7952 850 765 www.voxsmart.com George Ralph is the Managing Director of RFA UK, with over 15 years technical experience and having founded a number of successful technology businesses, he is committed to providing excellent service and in establishing RFA UK as the trusted technology partner to the UK finance sector. With the spotlight on cybersecurity and data governance, George can talk to you about keeping your data safe and secure, whilst maximising the speeds, performance and efficiency of your business processes. E gralph@rfa.com T 020 7093 5010 www.rfa.com