This article was written by Simon Richards, CEO of Fonetic.
Brexit and Dodd-Frank
With the Brexit vote still a recent memory, many financial institutions are wondering where the banking compliance and regulation ground lies – will MiFID II still stand or will it be replaced? Add to this Donald Trump’s declarations that he plans to dismantle the Dodd-Frank Wall Street Regulation, should he come to power, and it’s easy to understand why the industry is uncertain about the strength of proposed legislation and what is likely to be required from them.
The reality is, Brexit isn’t likely to have any major impact on the implementation of MiFID II for UK banks. Elements of the requirements outlined in MiFID II are based on commitments that were agreed upon by all G20 members. These requirements were based on a reform agenda stemming from the financial crisis in 2008. As a G20 member the UK will be required to introduce legislation with the same requirements.
Following Brexit, the UK now has a two year period to renegotiate its relationship with the European Union across all sections of the EU single market. As part of these negotiations the UK will need to make a strong case to retain full access to the European financial markets, and must negotiate to remain a part of the European Single Market.
This is likely to include adopting MiFID II as the common trade banking legislation or implementing MiFID II-like regulation in the UK.
Aside from this, MiFID II is due to come into play on 3rd January 2017 meaning that it will have been implemented by the time the UK finishes exit negotiations with the EU.
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What exactly does MiFID II expect from banks?
One significant aspect of MiFID II is the scope of the Transaction Reporting Obligation – firms will be required to keep a complete record of all services, activities and transactions in a format that can be accessed by regulators.
– Phone and Ecomms – firms must record all phone and ecomms relating to concluded and potential transactions. The records must be kept for a minimum of five years and where requested by an authority up to seven years (under Dodd-Frank, phone recordings are required to be kept for 12 months).
– Storage – storage must be in a medium that can’t be changed or deleted and must be available to clients on demand.
– Trading – all trades, including algorithmic trading records, must be stored on an approved form with accurate, time sequenced record of orders, placed executed or cancelled. Firms must keep all relevant data relating to orders and transactions, whether for their own account or on behalf of clients.
In order to fulfil these requirements most banks will be required to overhaul their trade surveillance and reporting infrastructure to meet the time sensitive demands made by the financial regulators.
Ultimately it is unlikely that MiFID II will become irrelevant for UK financial institutions. And even if MiFID II is dropped by the UK, very similar legislation, with comparable recording and reporting demands on banks, will be introduced. Banks that understand that trade regulation and compliance is here to stay and begin the technology transformation journey early will save money on unnecessary fines and benefit from efficient trade recording and reporting to generate long term ROI.