March 23, 2018
Any marathon runner will tell you that the key to a strong race is training. The more seriously you take your training, the better position you’ll be in to beat your personal best or finish ahead of the pack. If you slack off or wake up one morning and think, ‘I think I’ll run a marathon today,’ chances are you won’t perform well, and you may not cross the finish line at all. There’s a big difference between a 50-meter sprint and a 26.2-mile run, after all.
For those in the asset management space, you likely feel that you’ve been signed up for a new race: MiFID II, the sweeping European regulation designed to increase transparency and bolster investor protection. The go-live date for MiFID II arrived for asset managers and other practitioners across the financial services landscape in January 2018, with firms spending considerable time and resources over the past year or two taking a hard look at their data systems, fee structures and reporting processes to ensure they were ready. But it’s important to look at MiFID II compliance as a long-term marathon, not a tick-the-box sprint.
By now, most firms have met the minimum requirements to (1) produce the necessary regulatory reports; (2) split out costs for transparency into fees; and (3) provide proof of best execution. The winning questions are: What is the quality of your MiFID II response? And is it economically and operationally achievable over the long run?
Across the buy-side, a lot of necessary work has gone into MiFID II preparation, however, the work is far from done. Now is the time to move from bare minimum compliance to focusing on quality and completeness.
Now what? Reconciliation
It’s one thing to report data, it’s another thing to make sure it’s validated. Last year, investment firms were trying to make sure they were sending the necessary data into repositories. Now that MiFID II is live, regulators and investors will be looking at all that data and demanding to know if it’s all correct. Consequently, reconciliations will be more important than ever.
If asset managers are taking a manual or low-automation approach here, it could quickly prove to be a thorn in your side – or a cramp in your leg. Ensure you have a highly automated, robotics process automation (RPA) enabled reconciliation system to efficiently and accurately validate data and pinpoint any discrepancies so you – along with regulators and your investors – have confidence you’ve got the right data in the right place.
Now what? Best execution
With the unbundling of research as a centerpiece of MiFID II, proof of best execution goes hand in hand. You’ve got to prove you are making the best investment decisions and that you are making smart choices about the broker you use at a whole new level of detail.
For the best approach to best execution reporting, asset managers will need to train hard with high levels of automation to provide transaction cost analysis and related calculations to demonstrate best execution. We believe that it will becoming increasingly common for regulators and investors alike to look at whether or not you have automated solutions in place to efficiently and accurately generate these reports.
Now what? Reputation and competitiveness
Ultimately, no one gets a MiFID II stamp of approval. There’s no prize or medal awarded to those that go beyond baseline compliance and emphasize the importance of quality and completeness. However, as with most regulatory mandates, the opposite is true. Make a MiFID II mistake, and your firm may find itself in less-than-flattering headlines that could have a potential negative effect on reputation.
Following on from reputational risk, it is not a stretch to view a next-level approach to MiFID II compliance as a potential competitive advantage. This is where your compliance marathon training comes in. When potential investors conduct due diligence, you want them to find operational excellence – you don’t want a bare minimum or slapped-together regulatory response to be a deal-breaker. Could you hire huge teams to tackle reporting and validation? Sure. But investors will be increasingly looking for asset managers to demonstrate a watertight approach with the flexibility and scale that can only come with forward-thinking intelligent systems and high automation.
The MiFID II race has begun. Now it’s time to make sure that you’re training for the long game, so you know for certain that you’ve got everything in its place. If you don’t have the automated, integrated systems in place today to empower an efficient, scalable response to MiFID II’s many demands, it may be time to start sweating.