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How MiFID II Will Impact Buy-Side Firms

As the implementation of Markets in Financial Instruments Directive looms in July of this year, a new trade monitoring regime will get underway. With this new regulation, buy-side asset management firms are in the process of identifying the right integrated solutions. Specifically, firms are in the process of determining the best data management approaches to deal with the impact of MiFID II legislation on their investment lifecycles.

“Firms are dealing with the impact on investment lifecycles.”

How MiFID II will change reporting
MiFID II will deeply affect market infrastructure, data reporting requirements and trade recording obligations and several other areas of research remuneration for buy-side firms.

As a result, firms are now analyzing their investment workflows to determine which activities in the lifecycle will be impacted. Many asset managers are trying to get the right framework in place in preparation of the deadline either through outsourcing or building internal data management and reporting for all four stages of their investment workflow processes: pre-trade, trading, trade management and operations. These MiFID II regulations will specifically target these four stages of a typical investment.

Pre-stage
Asset managers will need to ensure they have the ability and capacity to aggregate pre-trade and post-trade data from new and old sources and venues. It will also be necessary for these firms to determine if they need to report pre-trade or post-trade, establish systems to remunerate and review research and incorporate systems that ensure best data in the execution selection process. Ensuring compliance by conducting accurate best executions, trade reconstructions and market abuse analysis monitoring activities late in the investment lifecycle will only be possible with proper event recording.

Trading stage
There is the potential for significant changes in the trading stage under the new rules. This is due to the changes in transparency requirements, structures in over-the-counter markets and caps on off-venue equity execution. These stricter rules will mean that buy-side asset managers will need to rethink the way they record trade executions.

The result of these new rules will be an increased number of execution methods, competition, liquidity fragmentation and an increased number of order types and automation methods involved in trade workflow procedures.

The result of these new rules will be an increased number of execution methods, competition, liquidity fragmentation and an increased number of order types and automation methods involved in trade workflow procedures.

Trade management stage
Trade management will not be significantly affected by the MiFID II rules. This is due to the fact that MiFID II will not implement stricter requirements on electronic trade confirmation, allocation and settlement guidance.

Operations stage
Operations will be dramatically impacted. For starters, post-trade compliance reporting will need to be more comprehensive than the previous regime. Transaction reporting will be made through the same reporting mechanisms, however the number of instruments, data fields and reporting parties involved in data submissions will be greatly expanded.

Overall, post-trade compliance reporting will need to include solutions that make the post-trade process more transparent. This will be achieved through the integration of transaction reporting, transaction cost analyses to show best execution, “write once, read many” golden-source data storage and metrics that link data with communication capture to ensure compliance with trade reconstruction market abuse rules.

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