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MiFID II Kick-Off: Chaos? Maybe Not

Adam De Rose

Now that we’re half-way through the first month of MiFID II, it’s time for a look-back at the launch, where we are today, and what’s still left to be done. We at Eze of course have been monitoring the landscape closely and focusing on ensuring a smooth transition for our clients. For the most part, it’s been busy, though thankfully largely uneventful in the last two weeks. Conversation volume has been elevated, of course, but certainly not shrill.

Elsewhere, there is a chorus of complaints rumbling in the press.

A recent Finance Magnates article declared MiFID II is off to a ‘messy start,’ particularly when it comes to reporting. But is it really that bad?

Buy-side firms are notoriously, and understandably, private entities. Each of them is valiantly attacking MiFID II’s trade and transaction reporting challenges, but almost all of them are unknowingly encountering obstacles that are common across their peers. This makes MiFID sound a lot worse than it really is. Twenty buy-side comments that transaction reporting is a headache does not make twenty separate issues.

Throughout 2017 we saw many working groups spring up and many clients shed their treasured privacy to join industry associations, but in the first week of MiFID it seems many have forgotten that there is great strength to be found in numbers.

Perhaps this is due to the heads-down, battle-through-it mentality that is so easy to slip into when trawling through thousands of rows of transaction reports and dealing with rejects, but taking a step back to evaluate the common problems that are industry-wide— not idiosyncratic—is where we should turn our attention now.

Many of the issues our clients have encountered are straight-forward teething issues. Static data wasn’t set up properly, or an ARM changed the format of the file name an hour before reports were submitted… things of that nature. Frustrating to be sure, but relatively easy to troubleshoot and fix, and not at all surprising given the combination of the complexity of the task and the unusually short time frames in which to achieve success. The Finance Magnates article referenced highlights those timeframes as one of the key factors contributing to the not-quite-chaos.

“But wasn’t this all tested before Jan. 3?” is a question we hear frequently. Of course, testing has been going on for months, but it was all theoretical until two key pieces of the process fell into place.

The first was the necessary appearance in FIX messages of the prescribed tags required to drive the logic of transaction and trade reporting interfaces, without which testing would fail to reveal the kinks. For those tags, the buy-side is dependent on their brokers, who are in turn dependent on venues. It is this monumental web of interdependence that is the proximate cause. As we have seen from the recent postponement of the double volume cap mechanism, even the regulator is dependent on others to allow them to fulfil their own obligations. Now that the FIX tags are flowing, the kinks have been revealed and they are being ironed out very quickly.

The second was the migration of the ARMs and the NCAs into production. There is currently a disagreement rumbling between the ARMs and the FCA about a minor point of validation – one that is of negligible value whichever side you take, but is nonetheless causing high reject volumes and elevated blood pressures. This is simply unnecessary and should be allowed to work itself out in full view of the dependents. Remember that transparency idea?

Getting to the crux of the industry-wide issues now, certain reporting scenarios are open to interpretation and it is a matter of fact, not opinion, that opposing interpretative stances have been adopted. In some circumstances, the buy-side is themselves facing two counterparties who take opposing views for what appears to be the same trading scenario. If the buy-side’s report must match the sell-side’s, that means the buy-side is now faced with the uncomfortable choice of reporting the same trade differently depending on who they face, or choosing one approach and risk being “unmatched” versus one of their counterparties. I’m hearing that phone calls between buy-sides are starting to identify common problems, but these tend to end with a shrug and no positive action, for entirely understandable reasons. Simply put, ambiguity is paralysing.

This is where those working groups and industry associations need to be utilised again, as effectively as they were last year.

Let’s get the feedback channelling back through bodies that represent the collective interests and demand clarity. I am positive those bodies are ready, willing, and able to fill that role. I have seen evidence that they already are. But if you’re not talking to them, you’re part of the problem.