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The following guest post is courtesy of Sophie Gerber, Director of regulatory and compliance solutions provider TRAction Fintech.
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As some of the largest-scale reforms for the European financial services industry, MiFID II and MiFIR which will be implemented on Wednesday, 3 January 2018 are set to cost billions of dollars in implementation costs and ongoing compliance expenditure. The consultancy Opimas has told the Financial Times it estimates that the cost of implementation of MiFID II will be in excess of EUR 2.5 billion.
The impacts of MiFID II costs
The regulatory reforms aim to reduce the likelihood of financial crises through increased market integrity, though they will no doubt come at a cost on an industry- and economy-wide level. While regulators are not expecting compliance in complete conformity with the new rules, they do expect firms to “have taken sufficient steps to meet the new obligations by the start date”. Despite this, 37% of respondents to a Thomson Reuters survey (executives whose firms will be impacted by MiFID II) said their firm is not fully prepared.
The costs of implementation and of ongoing compliance won’t just affect the books, but also operations. With human resources and organisational focus shifting away from business development, product enhancement and other key areas, the focus on regulatory compliance has an impact on enterprise and growth. This is particularly important for CFD and FX brokers, which typically have smaller regulatory teams and will proportionately bear more costs. The high cost of ensuring compliance also means that the incidence of the costs cannot fall solely on clients and counterparties. The remaining cost will indeed have an impact on ratios and therefore it’s important to determine how the costs can be minimised.
A major cost – Transaction reporting
A representative of the US bank Brown Brothers Harriman told the Financial Times that “complying with transaction reporting requirements will require significant investment”3. Transaction reporting requirements for MiFIR have greatly increased in scope: OTC derivatives have been brought into the scope of reporting, the number of fields has gone from 23 to 65, a wider range of entity and product identifiers is required and LEIs of clients will need to be reported – all on a T+1 basis. This will certainly require a huge investment to tackle.
How can individual firms minimise the costs?
The period before the commencement of the new regime is the right time to build efficiencies into systems so that costs can be minimised from the start. One way of doing this is to capitalise on huge advancements in data management and technology that allow automation and outsourcing in transaction reporting.
The costs around MiFIR transaction reporting involve firstly, determining your reporting obligations – requiring allocation of internal resources and/or engagement of external consultants to analyse the application of the regulations to your firm. Where you are potentially subject to multiple reporting regimes or operate across jurisdictions, the analysis may become complex. Reporting directly to an approved reporting mechanism (“ARM”) and reporting through a third party reporting solution can have different costs, which are considered in turn below.
1. The traditional approach: Reporting directly
- Internal Resources: Meeting the reporting requirements may require re-training existing staff or hiring additional staff. The former can divert human resources from existing projects and the latter adds to employment expenses.
- Infrastructure: Firms need to spend time and resources to develop ways of generating transaction reports in the correct formats. This in addition to the procurement and storage of all the required data.
- ARM Fees: Firms can directly engage with an ARM for MiFIR transaction reporting. Charges are generally a fixed monthly or annual account fee plus a per-transaction charge.
2. Reporting through a delegated third party
Outsourcing your reporting obligations to a specialised trade reporting provider can result in the following cost savings:
- Free up your internal resources and allow your team to focus on the core offering.
- Reduce the need to obtain and pay for external advice.
- Limit the infrastructure expenditure you incur.
At TRAction Fintech, we include consulting in our fees so that you can be confident in your reporting obligations without engaging expensive external consultants. We also have IT specialists who can work with your IT team to adjust your systems to be reporting-ready, again without additional charge. Best of all, we don’t add these charges to our base reporting offering. Instead, we charge you the same fees (or less) as you would incur if reporting directly to an ARM.
If you think TRAction Fintech may be able to help you to minimise your trade reporting costs, contact us for our pricing structure.