MiFID II Roundtable, September 2015

MiFID2-ButtonSilvano Stagni, of Hatstand, Suren Chellappah of AB Bernstein (formerly AllianceBernstein) and Dan Simpson, head of research at JWG Group discuss everything that most reasonable people could expect to want to know about MiFID II. If there is something we have missed, readers are invited to make their own submissions to [email protected]


ISS Magazine: What are the key changes in transaction reporting from MIFID I?

Silvano Stagni, Hatstand: The extension of the scope of MiFID II/MiFIR to non-equity instruments also broadens the scope of transaction reporting. The obligation to report transactions is also extended to those contracts where the underlying instrument is admitted to trading even when the derivative is not.

Another key change is the introduction of the concept of ‘Authorised Reporting Mechanism’ (ARM). This permits a third party to be delegated to submit transaction reporting on behalf of the trading institution.

MiFID II/MiFIR also states that if a transaction is executed on exchange by a counterparty that is not subject to MiFID, the execution venue has to report it. The transaction report will have to include the trader’s code, a flag that states whether a transaction in shares or sovereign bonds is a short sale, if a Credit Default Swap associated with a sovereign bond is naked or covered, or if a transaction took place under an applicable waiver (for instance, large in scale or negotiated trade).

Suren Chellappah, AB Bernstein: There will be an increase in the number of fields to report for equity transactions e.g. capture and retention of personal information relating to the person performing the execution and short sell flags. Stock borrowers and stock lenders will also have to report their transactions. There is a greater dependency on asset managers providing information to the broker e.g. details of the person at the asset manager sending the order to the broker. There will be an increase in the number of asset managers performing their own reporting rather than relying on their broker (as is currently the case). We believe they will be reluctant to release personal information on their staff. The original directive covered only equities but MiFID II brings bonds, derivatives and structured products into scope for transaction reporting.

Dan Simpson, JWG Group: MiFID II has expanded the scope and level of investment firms’ transaction reporting obligations. Transaction reporting will apply to a much wider range of financial instruments and also requires the admission of additional mandatory data.

The number of fields in a transaction report has risen to 81, which represents a 250 percent increase on the 24 required under MiFID I. The data required to fill these new fields is very granular, for example sourcing the persons and computer algorithms within the investment firm responsible for the investment decision and the execution of the transaction will not be easy.

MiFID II also imposes an obligation on firms that receive and transmit orders, but do not execute them. These firms must convey certain details to the receiving investment firm, or to report the order themselves (MiFIR Article 26(1)-(8)).

In the context of the significant problems with trade reporting under EMIR the pressure on firms to get transaction reporting right in 2017 will be significant. Even with the ARM system, ultimate responsibility for transaction reporting remains with the investment firm, and there are fewer rules regarding the way data is distributed.

“MiFID II also imposes an obligation on firms that receive and transmit orders, but do not execute them. These firms must convey certain details to the receiving investment firm, or to report the order themselves.” – Dan Simpson, JWG Group

ISS Magazine: What will market structures look like under MIFID II?

Silvano Stagni: New trading venues, changes to the definition of best execution and the obligation to trade liquid instruments on exchange will bring about the most fundamental changes in the structure of the market. Those who operate a trading platform where clients can trade non-equity instruments will have the choice to register as an Organised Trading Facility (OTF) or to execute those trades through third parties. Those who run a proprietary trading portfolio will have to register Systematic Internalisers (SIs).

One of the most ‘disruptive’ changes is the definition of best execution. In MiFID I it was “the best outcome for the client”. MiFID II extends the concept to include price, total transaction cost, transaction speed (as the time elapsed between the execution venues receiving the order to execute and the actual execution of the order) and likelihood of a transaction taking place within the parameter of the order. The new rules on best execution include an execution quality report where orders need to be grouped by financial instrument, execution venue and order type. Any reason that might have influenced the financial institution to execute the order in a specific venue should also be included, such as inducements, common shareholder(s), parent company-subsidiary relations, discounts, etc.

Last but not least, the obligation to trade on-exchange liquid instruments is part of the overall push towards on exchange agreed by representative of the G20 in 2008. The only issue not covered by the current definitions of technical standards is the definition of liquidity. One size fits all and the equity model does not necessarily work in this environment.

Difficult to predict is the impact of the changes to ‘non-transparent’ trading. Dark pools will have to operate within a set of exemptions from the transparency rules. These are mainly ‘large trades’ and ‘negotiated trades’. The latter are not only subject to the double volume cap of 4 percent of the volume of trades on a single trading venue and 8 percent of the volume of trades across all the EU trading venues. The volume is calculated as the rolling total of the past 12 months. At the latest hearing, ESMA discussed publishing on a daily basis the value of 3.75 percent and 7.75 percent of the volumes as a way to ensure that the cap is not broken unintentionally because a specific trade would send the total over the value of the cap.

However, in my opinion, the largest impact of changes to dark trading will be the obligation for negotiated trades to take place within the “environment of an execution venue” This may push institutions that currently operate large dark pool trading to register as MTFs (multi-lateral trading facilities, if they deal in equity) or OTFs (if they deal in any other asset class). Registration as a trading venue implies an obligation to produce transparency reports. Both large in scale exemptions and negotiated trade exemptions have some form of post-trade reporting.

Suren Chellappah: Firms operating an internal matching system which executes client orders in shares and other equity instruments on a multilateral basis will likely need to be authorised as an MTF. Bonds and derivatives, which are currently traded OTC (over the counter), will be brought into organised trading venues. A consolidated tape will be implemented. The new Approved Publication Arrangements regime may result in new entrants providing data services which may lead to changes in how and where we ingest data.

Dan Simpson: Although there is still some uncertainty around the details, the policy drivers are clear: all activity related to price formation will be transparent. In the future, organised trading will take place on regulated venues or SIs. To enable this, the OTF has been proposed to capture broker crossing networks and other multilateral trading in non-equity instruments, which does not currently take place on regulated markets (RMs), MTFs or SIs. Furthermore, OTFs will be able to exercise discretion in order execution and will be able to trade on a proprietary basis on their own platform in illiquid sovereign bonds and trade on a matched principal basis in all bonds.

In line with G20 agreements, transactions in derivatives subject to the clearing obligation under the European Market Infrastructure Regulation (EMIR) will be required to take place on an RM, MTF or OTF if the instrument is sufficiently liquid. Shares will be required to be traded on a RM, MTF or SI unless certain criteria apply, such as the transaction does not involve a retail client.

The idea behind this initiative is to induce competition by creating a “menu” of structures for multiple kinds of financial products to be traded, from which investors can choose. At the same time, the obligations surrounding each structure ensure that they adhere to the same broad transparency requirements. Therefore, regulators and investors are able to monitor markets and track prices more easily. It remains to be seen whether reclassification of single dealer platforms, broker crossing networks, MTFs and third-country platforms such as SEFs, will represent greater opportunity for flow, or impact the executable liquidity in non-equity markets. We could well see new platforms, utilities and markets forming to help cope with this massive transformation effort.


ISS Magazine: What will be the effect of changes in transparency requirements?

Silvano Stagni: Transparency requirements have hardly changed for the equity world between MiFID I and MiFID II. The main changes are a consequence of the obligation to trade on exchange so ‘dark’ trades, as we know them now, will become impossible. Transactions that are not meant to change the share market price can only happen under one of the exemptions, specifically either large in scale or negotiated trades.

Implementing the double cap for negotiated trades (4 percent of the volume of trades in that exchange in the past 12 months and 8 percent of the volume across the whole MiFID area) is not difficult to implement. The figures for the two caps are managed by ESMA who will publish the 3.75 percent and 11.75 percent level on a daily basis to ensure compliance with the caps. One of the most important and less discussed clauses is that the trades will have to take place in “the environment of an exchange”, therefore the platforms used for negotiated trades will have to be managed by an exchange. Those who currently operate a dark pool platform will definitely have to change the way they work.


MiFID II and MiFIR extend their scope to non-equity instruments. Therefore pre- and post-transparency regimes will be extended to non-equity instruments. Transparency, OTF and the obligation to trade on-exchange for liquid instruments will increase the volume of Market Data. There is also a serious risk of doubts emerging about the quality and timeliness of some of this data unless a Market Data vendor collates, validates and distributes data from all those exchanges.

Suren Chellappah: Echoing Silvano, dark pools will be allowed to trade up to a maximum percentage of the equity of a listed company – 4 percent on any one dark pool and 8 percent across all dark pools. Once these limits are reached then trading has to take place on lit venues only. But a key question will be – how does a dark pool know when to halt trading in a particular equity?

Dan Simpson: MiFID I introduced harmonised transparency requirements for trades in shares taking place on a trading venue. The idea was to improve price formation and to allow clients to verify whether their brokers were complying with ‘best execution’ rules. The new regulation extends the scope of transparency requirements from just shares to other ‘equity-like’ instruments such as depositary receipts, exchange- traded funds and certificates that are traded on regulated markets, MTFs and OTFs.

Increased transparency can be positive for investors, but one potential downside from this proposed increase in transparency is that in less liquid markets this may negatively impact liquidity. As the publication of trade data may undesirably impact the execution of trades entered into after execution. Therefore, this could hurt the very price formation and best execution objectives pursued by the transparency requirements. However, one certainty is that MiFID II’s pre- and post-trade transparency rules will cause a massive amount of new data to be published to the market.

“The obligation to trade on-exchange liquid instruments is part of the overall push towards on exchange agreed by representative of the G20 in 2008. The only issue not covered by the current definitions of technical standards is the definition of liquidity. One size fits all and the equity model does not necessarily work in this environment.” Silvano Stagni, Hatstand

As both Silvano and Suren point out the double volume cap on waivers for pre-trade transparency in equities is a key change, calculating the denominators in order to determine where the caps will lie is seen as problematic. The bottom line is that trading venues will need to implement invasive new systems and controls to comply with the transparency requirements. Members of trading venues will have to consider what impact the revised transparency regime will have on their trading activities.

ISS Magazine: What are the technicalities and implications of the research unbundling process?

Silvano Stagni: The value of research is inherently subjective. Pricing research will be complicated. Separate contracts will have to be drawn up between the sell-side providing the research and the asset management companies. In turn, asset managers might have to draw up contracts with each fund they manage if they want to charge for the use of their research. Regardless of whether they intend to charge the individual funds or not, they will have to decide what they use to pay for research.

If they use their own money that leaves them open to the debate on whether (a) research is part of their management fee (and therefore, in a way, still bundled as far as their client are concerned) or (b) research is a tool they use to perform their services and, by its very nature, is included in the management fee. On the other hand, if they use client money they may find themselves in more difficulties as to who benefits from their research, especially if they give their clients the option to decline the payment. In any case a lot of contracts will have to be revised.

ESMA has relaxed its position on how research should be paid for but there are differences between regulators. The Financial Conduct Authority (FCA) favours a system called Research Account Payment over a Commission Sharing Agreement (CSA) whilst other regulators in Europe have taken a different view and would allow a CSA ‘adjusted in some fashion’.

Suren Chellappah: As a global broker, we are concerned about the impact ESMA’s unbundling proposals could have on our asset management clients, specifically those proposals where either the fund manager picks up the costs or recharges an explicit research cost to the underlying funds. We think that is bad news for Europe, for asset managers – especially smaller to medium-sized firms – and could be bad news for many broker dealers.

We believe it will reduce the amount of research available to investors, reduce its quality, reduce competition and make it more expensive to obtain research. It’s obviously also putting the European Investment industry at a disadvantage to American and Asian brokers that don’t have this issue. It’s likely to prove to be a very good example of a rule change having significant unintended consequences. ESMA’s research payments account leaves the asset manager with a practical administrative burden of negotiating budgets with underlying investors and administering any payments to research providers. That’s a big challenge.

The proposed MiFID II unbundling rules are applicable to discretionary managed portfolios only.  UCITS and AIFMD funds are out of scope but these represent a significant amount of assets under management.  A single fund manager and/ or client will often be invested across all 3 rule classes leaving open the question on when rules will be harmonised

Dan Simpson: The unbundling and separate presentation has raised a number of questions and concerns for brokers and the funds they service. There are definitely concerns, as Suren says about these provision simply limiting the availability of research to investors. Many are concerned that unbundling will cause broker research within all but the most heavily traded stocks to disappear. This is due to the buy-side being more selective in what research they want and what it is worth to them. Currently, asset managers are being forced to cut their management fees in order to compete more effectively, which in turn also reduces the commission they are willing to pay to their brokers.

One technicality that has arisen in light of the new regulations is the difficulty in valuing research. As research is subjective and depends on many factors, brokers will struggle to price their research, whilst asset managers will have to assess whether the research they are receiving holds the correct value for money. In light of this, pricing mechanisms and billing systems will have to be created.

There are also concerns that the quality of research may decrease as prices become more transparent. The urge to minimise costs is likely to lead to a rationalisation of the research market, resulting in fewer providers and securities being covered. Furthermore, research by Bank of America Merrill Lynch has estimated that unbundling could add seven basis points a year to the cost of managing an equity mandate. As a result, smaller fund firms face potential extinction as they may not have the scale for internal research functions.


ISS Magazine: What will be the practical impact of the new trading obligations and clearing of exchange-traded derivatives?

Silvano Stagni: EMIR also bases the obligation to centrally clear a derivative on liquidity. The MiFID II/MIFIR obligation to trade on-exchange is based on a similar definition of liquidity. EMIR also says that (exchange-traded derivatives) ETDs do not need to clear. This will have interesting implications once both regulations are active. I suspect that something will change. Under MiFID II/MiFIR, the obligation to trade on-exchange depends on a concept of liquidity that may or may not work for all financial instruments. Hopefully the next stage of the definition of technical standards will clarify this issue.

Dan Simpson: The MiFID trading regulations apply to derivatives that are not cleared via a central counterparty (CCP) or traded on a trading venue. If the derivatives are within scope, then they must trade on RM, MTF, OTF or third-party country equivalents. The only derivatives contracts that will in future continue to trade OTC (over the counter) are those that do not meet the test of being ‘clearing eligible’ and ‘sufficiently liquid’, and whilst as Silvano says there are similar liquidity provisions under EMIR it is important to note that these are not harmonised, and this could cause confusion in the market. Derivatives not subject to the trading obligation may be traded on a trading venue, OTC or OTC via an SI.

The scope of the mandatory clearing obligation imposed by EMIR was extended within MiFIR to include all derivative transactions, both ETDs and OTC derivatives, settled on a regulated market. It requires clearing members to ensure that derivatives are submitted for clearing acceptance “as quickly as technologically practicable”.

The post-reform landscape has wide-ranging implications for those who are on the sell-side and also the end users of derivative transactions. In light of the electronification of OTC markets and their convergence with ETDs, a consolidation of ETD and OTC derivative infrastructures and trading behaviour is possible; as a result they will be traded on similar exchanges and follow similar processes.

“A key question will be – how does a dark pool know when to halt trading in a particular equity?” – Suren Chellappah, AB Bernstein

ISS Magazine: Will the open access provisions achieve the regulatory objectives for derivatives markets?

Silvano Stagni: Open access breaks the link between executing a derivative trade and clearing the derivative trade. This will make it easier for more players to enter the market and provide more choice. Unfortunately it will work only for standard contracts. Otherwise there will be invisible barriers to a truly open environment. The more ‘variations’ that are out there the higher the number of barriers.

Dan Simpson: In line with the policy focus on competition, the European Commission proposed rules on open access to trading, clearing and index licenses as part of MiFID II. The Commission highlighted that open access provisions will reduce trading and post-trading costs, lower the barriers for entry and exit of new players, and support technical and product innovation coupled with investor choice.

Open access allows users to process trades through a clearing house of their choice irrespective of where they traded. The non-discriminatory access regime will also apply to benchmarks for trading and clearing purposes. Currently, an index provider can link an index to a venue indefinitely and it has been argued this gives it a monopoly over access and pricing. Under the new regulations, benchmarks will have an obligation to license no later than two years after the financial instrument referencing that benchmark started trading.

The access provisions turned out to be one of the major political hurdles in the MiFID II negotiations. After lengthy discussions legislators decided to retain the open access provisions for trading venues and clearing houses, albeit with a phased-in and transitional approach. Open access for instruments such as equities and bonds will commence in Q4 2016. Open access for ETDs will also commence in Q4 2016, but this could be extended to Q2 2019 if the Commission decides that a transitional period is required.

Overall, the introduction of ‘true competition in derivatives’ clearing should be positive. However, due to concerns from some member states wishing to protect their domestic interests and clearing houses seeking to main their revenue streams it is possible that these regulations will have to be made more robust to ensure competition.


ISS Magazine: What will be the likely effects of interaction between MIFID 2 and other existing regulations? Complementary or conflicting? Enlightening or confusing?

Silvano Stagni: The provision of MiFID II/MiFIR will interact with several other regulations, from EMIR to MAD (Market Abuse Directive)/MAR (Market Abuse Regulation), from CRD IV (Capital Requirements Directive)/CRR (Capital Requirements Regulation) to ESMA guidelines on short selling, to mention just a few. There are few examples of co-ordination. The ARM (Authorised Reporting Mechanism) will enable Transaction Repositories set up under EMIR, to act as reporting agents for transaction reporting under MiFID. The inclusion of the trader code in MiFID transaction reporting allows the investigation for insider trading that MAD and MAR will require.

On the conflicting/confusing front, the most glaring example is the definition of liquidity that would trigger the obligation to trade on-exchange under MiFID II/MiFIR. It is consistent with the definition of liquidity that triggers central clearing under EMIR; but, under EMIR, as already noted, an ETD does not have to be centrally cleared. This may not be a conflict per se but the implications go against the principle behind central clearing unless there is some future adjustments on the EMIR side.

Overall, harmonisation of rules, both within a jurisdiction and across borders, is needed. It is understandable why teams worked in isolation when drawing up the rules. The reality is that several regulations will have to be implemented by the same organisation and some of them do not share space.

Dan Simpson: In October 2014 at the MiFID II conference, the FCA stated that the future of EU trading was in the balance and work should start now – not because we already know precisely what all the rules look like, but simply because there would not be enough time to do something for all the rules otherwise. Unlike some other regulatory deadlines, there is no realistic chance of pushing the 2017 date back significantly.

MiFID II is very different to MiFID I. It is broader in its coverage and has challenged the ability of the industry to create workable solutions to the many of the implementation challenges. At JWG we have identified hundreds of dependencies on other regulations, authorities, systems vendors, data vendors and market infrastructure. Yet, as we have seen from our industry standards efforts for EMIR, there is an expectation from the public sector that the industry will step forward to help drive the understanding of requirements ‘to ground’.

Dodd-Frank and MiFID II cover the same ground when implementing G20 derived principles. Therefore, this US legislation should also be taken into account when developing MiFID II. This would help to avoid making the compliance burden for global firms greater and also to prevent opportunities for regulatory arbitrage.

The scope of the proposed new market abuse regulation (MAR) is intended to be consistent with the scope of MiFID. In light of this, the scope of MAR has been extended to cover all financial instruments covered by MiFID II. Considering the number of interlinkages between the two regulations the regulators must give consideration to both the definitions and breadths of terms.

“The new regulation extends the scope of transparency requirements from just shares to other ‘equity-like’ instruments such as depositary receipts, exchange- traded funds and certificates that are traded on regulated markets, MTFs and OTFs.” – Dan Simpson, JWG Group

ISS Magazine: What difference will MIFID II make for the customer? What will be the effect of the investor protection changes?

Silvano Stagni: MiFID II/MiFIR extends its remit to non-equity instruments. Therefore they extend the level of protection currently enjoyed by retail investors in equity products to retail investors in all other financial instruments. The MiFID review also introduces a category of “high-risk” instruments and limits any trading in those instruments to professional and eligible counterparties. Even some professional clients, such as a pension fund or local authority, will not be permitted to trade in those instruments.

MiFID II/MiFIR has also made the definition of professional clients stricter. It is not enough to be the managing director of a company with a certain level of turnover to be classified as professional client.

The specific steps that have to be taken to protect retail clients (e.g. suitability and appropriateness) have not changed; they are just being extended to encompass a wider number of clients. Client classification is made more complicated because the client can be classified in different ways depending on asset class and risk. In other words a list will have to be turned into a matrix.

Suren Chellappah: MiFID II will strengthen investor protection. Firms providing advice will need to inform clients if the advice is provided on an independent basis or not. There will also be changes to the way best execution results are presented to clients so they can identify the top five execution venues used for their order. Charge structures will be more transparent with an anticipated reduction in fees to underlying clients but what clients have to be careful of is the potential for increased complexity in charging models which result in no practical change to the overall cost to the client. ESMA, the EBA and home state regulators will have the power to ban or restrict the marketing, distribution or sale of certain financial instruments.

Dan Simpson: MiFID II introduces a number of new rules to strengthen investor protection standards and reduce conflicts of interest in the provision of investment advice. JWG’s analysis report, the MiFID II KYC mountain, finds that financial institutions have a 12-item checklist to work through for their MiFID II KYC implementation. Record fines for AML failures compound the pressure to ‘get KYC right’ as regulators prescribe new rules for anyone that wants to stay in the business; 500+ data requirements with new sources and definitions for customer data and 40+ new regulations with multiple, iterative implementation dates mean continually ‘digging up the road’.

The new rules apply to the design, marketing and distribution of products by investment firms, which must be tailored to the target market. Furthermore, remuneration and sales targets should not incentivise staff to recommend inappropriate financial instruments to their clients.

Due to the wide range of areas that these rules will impact, firms may need to under-go the process of re-papering. As some clients will require recategorisation as professional or retail clients, leading to further impacts on client take-on and post-transaction paperwork. Pricing and workflow changes will lead to changes required to terms of business, client agreements and confirmations.

It is also possible that workflow for execution only and advisory businesses will have to change. This is due to some obligations having enhanced requirements, such as best execution which requires evidence to be submitted, implying that it may well be harder for firms to prove that they have fulfilled obligations. Furthermore, firms may wish to take this opportunity to review their client agreements and how they communicate required information. The new regulations, require greater and more detailed information to be sent to clients, such as information regarding costs and associated charges which must be sent along with evidence of these.

“Under MiFID II/MiFIR, the obligation to trade on-exchange depends on a concept of liquidity that may or may not work for all financial instruments. Hopefully the next stage of the definition of technical standards will clarify this issue.” Silvano Stagni, Hatstand

ISS Magazine: How will the MIFID II equivalence and reciprocity measures work in practice?

Silvano Stagni: Two examples are better than a thousand words. Equivalence with Singapore means that an EU financial institution trading with Singapore does not need to follow the Singaporean rules for the EU half of the trade. Lack of reciprocity with the United States means that a US clearing organisation cannot operate within the EU without creating a EU-based subsidiary that needs to be authorised by ESMA to clear specific asset classes.

Dan Simpson: European financial services legislation has demonstrated a desire to impose extraterritorial requirements on non-EU financial services businesses accessing the EU markets. In particular, this has been seen in the Alternative Investment Fund Managers Directive (AIFMD) and more recently in MiFID II.

As many third countries with developed regulatory systems may not satisfy the requirements, firms currently operating within the EU need to seek full authorisation. However, MiFID II provides Member States with discretion to require third country firms to establish a branch in their jurisdiction in order to do business with these types of clients. It is worth noting that the conditions required to be met for establishing a branch are challenging.

Although the UK is planning to exercise this discretion, it is not yet clear which other Member States will. Nevertheless, it is likely that jurisdictions which have conventionally been more protective of their markets will chose to require third country firms to establish a branch in their jurisdiction if they wish to access the retail markets. This would represent a substantial business model change for many non- EU banks.


ISS Magazine: Is there a possibility that the requirement for detailed data will generate excessive amounts of data and become counterproductive, especially relating to non-equity trades? As we all know, human nature being what it is, the more information is made available to us, the less likely we are to read it.

Silvano Stagni: The excessive amount of data is evident in the execution quality report for derivatives. At its most detailed, the report requires to be printed the volume of trades by instrument, order type and execution venue (specifically the top five execution venues plus all the others) any information that could be interpreted as a reason to choose that venue (such as ownership, inducements, etc.). This is easy for securities because of their very nature. Given an order type and an execution venue all transactions can be aggregated. It is more complicated with some derivatives where any aggregation could only occur if two contracts are identical. In the case of an interest rate swap, that would need to be an identical cash flow down to number of transactions, dates and amount per transaction.

Even if you discount some of the volume of data estimated by some industry associations as panic-driven (over half a million items of data in one report), it is quite clear that an execution quality report for some derivatives instruments might generate very high volumes of data.

The obligation to trade on-exchange, the proliferation of trading venues and the new best execution rules that require the potential use of multiple trading venues (and consequently the availability of their market data) will increase the volume of data a company will have to manage. It will also increase the amount of information that must be displayed on a trader’s screen.

Suren Chellappah: I tend to agree. Time, energy, money and deep thought will need to be spent on big data-based solutions to make a meaningful interpretation of the vast amount of data being captured. This may be easier to accomplish at a regulator or large firm level. Medium- and smaller-sized firms will lag in this regard and focus on what is mandatory or essential. Additionally, in implementing new measures, legislators need to be careful about imposing significant barriers to entry.

Dan Simpson: One area in which MiFID II will undoubtedly have an enormous impact is data publication. Collectively the public presence of all of this new data will provide a banquet for firms and vendors alike to feast upon on post January 3 2017, and the impact on the market is likely to be substantial.

With the quantity of data soaring and the complexity of computing systems to deal with it intensifying, the view of how it works becomes more opaque and it becomes increasingly difficult for anyone to have an end-to-end view. This creates knowledge gaps between those who create the data infrastructure, those who build the computing systems, those who use those systems and those who make decisions based on the above.

As the industry has grown in size and complexity, the volume and types of risk within it have also multiplied. When attempting to maintain financial stability within the system, it is important to recognise the appearance of new forms of risk as endogenous. The more information that becomes available, the greater the ‘processing’ challenge to understand it. Analysing all of the data, all of the time, is impracticable. To extract meaning, the right questions have to be asked in the right way. The problem this creates can be termed the ‘illusion of control’. The numbers are there and because there are complex models behind them, people believe them.

“Time, energy, money and deep thought will need to be spent on big data-based solutions to make a meaningful interpretation of the vast amount of data being captured. This may be easier to accomplish at a regulator or large firm level.” Suren Chellappah, ABerstein

ISS Magazine: In which case, might the regulatory emperor be wearing no clothes?

Silvano Stagni: This is a difficult question to answer, because the answer will depend on the final consultation that is supposed to be published at the end of September 2015. There are several examples, some of which are hopefully being addressed in the final consultation. There seems to be an attempt to fit everything into the equity model, a lot of instruments definitely do not. There are several definitions of liquidity. Each one serves a purpose but it is difficult to see what the practical consequences are and how the market will react to some possible contradictions between the definition and current market reality. ‘Commodity’ is a definition that covers a wide range of things, from mineral to energy; from agricultural to freight rates. The definition of hedging and the definition of ‘ normal course of business’ vary by business sector and commodity type. This ‘one size fits all’ may have results that contradict the principles behind some of the rules. ESMA will hopefully address these issues in what is supposed to be the final consultation.

Suren Chellappah: Given the amount of data to be collected and transmitted to the regulator, then the onus is on the regulator to ensure they have analysed in the broadest way what has been sent to them. We will need to see how this will be managed.

Dan Simpson: Technically no, the regulator would be well covered in data. However, as with previous regulations we expect a period of incremental development post- enactment. As a result, it is possible that there will be a lag between data collection and the way in which the regulator envisages data interpretation to occur under MiFID II.

In the interim period, as the industry continues to grow in size and complexity, the types of risk within it have also multiplied. Reliance on any single model to provide ‘an answer’ is dangerous but if compounded with poor or incorrect data, the risk of creating ‘garbage in, gospel out’ escalates. It is, therefore, vital for regulators to take a risk-based approach towards the one area in which MiFID II will undoubtedly have an enormous impact – data publication.


ISS Magazine: Is there anything important that you think we have missed and think we must include?

Suren Chellappah: We should also consider the recording of telephonic and electronic communications. Investment firms will need to record telephone or electronic communications relating to the reception and transmission of orders, execution of orders on behalf of clients, and dealing on own account. Records will need to be kept for five years instead of the current six months, which has raised some concerns about the cost of storage, data retrieval systems. Cyber security – data protection – comes to the fore as firms capture more information of an increasingly sensitive nature.

Silvano Stagni: Speaking of Cybersecurity, this is an area where Europe leans a lot on guidelines and too little on prescription. There is no specific provision for the financial sector, an area that is heavily dependent on technology and therefore at risk from external attacks, internal misuse and abuse of data. The vulnerability is not limited to the technology environment of one specific organisation. For instance, if a data feed is tampered with before it reaches a bank the potential for damage is huge although the bank itself was never under attack.



Bernstein was founded more than four decades ago to manage money for families and individuals. Their focus has never changed, although their client base has expanded to include institutions, and the services, tools, and resources.

Exclusively focused on investment research and management; Bernstein don’t engage in investment banking and proprietary trading, so they don’t face the conflicts of interest such businesses pose for other firms. And, as a legal fiduciary, Bernstein take up the highest legal bar to ensure that their clients’ interests come first and foremost.

Suren Chellappah – Global Head of Risk — Sanford C. Bernstein Group; COO/ CFO —Sanford C. Bernstein Europe

Mr. Chellappah was appointed Global Head of Risk in 2012.  In addition, he continues to serve as the COO/ CFO for Bernstein’s European sellside business, a role he has held since 2003. Prior to that, Mr. Chellappah was the CFO for Instinet’s European broker-dealer business between 1999-2003.   Mr. Chellappah began his career at Prudential Corporation before moving to Instinet in 1993.  Mr. Chellappah holds a BSc in Civil Engineering from University College, Swansea, an MBA from Henley Management College and is a Fellow of both the Chartered Association of Certified Accountants and the Chartered Institute for Securities & Investment.  Location: London



Hatstand are a global financial consultancy and Capital Markets Specialists.  We operate in three key areas of financial markets:  Trading – Systems & Connectivity, Data Management and Regulation & Risk.

We work closely with our clients to deliver flexible, bespoke solutions that address the diverse challenges of the financial technology environment.  Our international reach allows us to successfully execute projects and managed services across the globe, with offices in London, Geneva, Dubai, New York, Hong Kong, Singapore and Sydney.

Silvano Stagni – Global Head of Research

After a long career as Change Director and Strategist for major financial institutions, Silvano decided to focus his professional growth on the Impact of Regulatory Change on IT. His experience in bridging communication gaps between stakeholders is the basis of his style as a consultant and writer.  Silvano joined Hatstand in June 2012 and now runs Hatstand’s regulatory practice in London and global thought leadership.


JWG Group

JWG are recognised by regulators, financial institutions and technology firms as the independent analysts to help determine how the right regulations can be implemented in the right way. JWG enable firms to execute efficient regulatory reform through collaborative working groups, syndicated intelligence and our next generation regulatory management platform, RegDelta.

Dan Simpson – Head of Research

Dan received a Bachelor’s Degree in International Relations and History from the London School of Economics in 2012, focusing his studies around international political economy. He is currently researching the impact of MiFID II /MiFIR and other EU trading regulation on the global marketplace, writing articles for RegTechFS and modelling G20 regulatory reform.