How much is it going to cost the financial services community to prepare for implementation of the revised Markets in Financial Instruments Directive, also known as MiFID II?
According to information provider IHS Markit and research firm Expand, the total bill for 2017 is likely to come to an eye-watering $2.1bn. That's undoubtedly a huge expense for financial services firms just at a time when they are already battling to reduce their cost-bases and invest in the crucial innovation that will allow them to thrive in the digital future.
To make matters worse for firms, it’s not clear to them how they will benefit from the new legislation, or indeed, if they will benefit. At the end of the day, the point of the new framework is to ensure that the firms’ clients enjoy best execution when trading. No one has ever suggested that MiFID II was devised with the intention of making life easier for the firms themselves. More’s the pity, you might say to that, and I would have some sympathy with you there.
It all adds up
From an IT point of view, the major bills associated with MiFID II are likely to come from increased data storage capacity and connectivity to new data sources. Firms are being expected to store, and report on, much more data than before. Not only will they have to report across a broad range of assets, they will also have to synchronise their systems with other market participants and effect the time stamping of trades. In addition, as more trading venues publish data feeds, firms will have to connect those feeds with their own systems and integrate the data into their front, middle and back-office processes.
With so much to do in terms of development, integration and the writing of extra reporting codes, many financial services firms will need to bring in extra development resources during the course of this year if they are to have any hope of meeting the 3 January 2018 deadline for implementing MiFID II. Since additional resource is likely to be costly, they will want to maximise the benefit they get from their investment in contractors. So if you're an IT director, how can you ensure that you are getting plenty of development bang for your buck?
- Make sure you understand exactly what needs to be done for the system to comply with MiFID II. If you’re not sure of the real requirements, you might end up accidentally over-engineering your firm’s systems, which could send costs spiralling. For example, it might be that data does not need to be time-synchronised at every point in the process or you might have unnecessary repetition taking place within different systems.
- Take a holistic approach to implementation. Don’t consider each asset class and venue as a silo; instead look for opportunities to consolidate different data feeds. Going a stage further, perhaps you could remove duplicate systems so that a number of trading centres across the European market share a single system? You will feel that you have really maximised investment in development resources if you can achieve future economies of scale.
- Look for outsourcing opportunities. Over the past few years, banks, in particular, have been actively exploring the potential of saving money by outsourcing certain activities. The arrival of MiFID II should prompt them to revisit this strategy again. Now is the time to evaluate whether your in-house IT function is focused on the activities that are core to the business, and give it a competitive advantage, or whether the function is too tied up on generic activities that could be more efficiently conducted elsewhere? Are there certain commodity activities that would be better off sitting with managed cloud vendors or managed hosting vendors? How could you redeploy key staff members if you could take these commodity tasks off their hands? These are some key questions to think about.
IT directors should reflect carefully on how they are managing their costs for several reasons. Firstly, their firms will expect them to use their budgets wisely - having to go to the management team, cap in hand, for a top-up towards the end of the year will not go down well. Secondly, they are responsible for ensuring that the cost their firm pays for trading while remaining compliant is competitive compared with other firms. If IT directors do it right, they have an opportunity to improve their firm's margin. If they do it wrong, they could find that their firm's margin takes a hit. Given that trading margins are already incredibly thin, they will not want their firm to end up in the latter situation.
Another significant consideration for IT directors is intellectual property (IP) and how they can retain valuable IP within their organisation beyond the implementation date. As with any large-scale IT project, MiFID II carries the risk that IT contractors who leave the project post implementation will take precious knowledge away with them. It is the job of the IT director to make sure that the permanent employees on their team are not so tied up on commodity activities (see point 3 above) that they do not get the time to acquire new skills and knowledge that will be of value to the organisation going forwards.
Of course, it will be extremely difficult - if not impossible - for IT directors to measure the value that MiFID II implementation brings to their organisation from an IT point of view. Fortunately, no one probably expects them to. Their firm will be spending money on MiFID II because it needs to comply with the legislative framework, not because it sees the directive as a revenue-raising opportunity.
That said, any IT director who does not use MiFID II as a reason to make efficiencies, develop their staff or to help drive a broader transformation programme is missing out on a big opportunity. As the biggest overhaul of European financial services regulation in a decade, MiFID II will inevitably be a big catalyst of change in the market and the firms that cope with this change the best will be those that have adapted to the new requirements in the most agile, resourceful and cost-effective way.