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MiFID II: Meeting Evolving Regulatory Requirements with Effective Data Governance

28 May, 2020  |  By PeerNova   |  Published in Articles,

MiFID II: Meeting Evolving Regulatory Requirements with Data Governance

Firms across the financial services industry have long complained of “regulatory fatigue” when dealing with the onslaught of new regulations in the wake of the 2008 financial crisis. The list of regulatory initiatives that firms have tackled over the past decade is vast and complex, including central clearing and execution mandates, stress testing regimes , and an array of transactional reporting requirements (such as BCBS 239, CCAR, CSDR, etc). The challenges multiply when considering the various jurisdictions rolling out rules with little thought to coordinate. The end result for many financial institutions is a hodge-podge of point solutions to solve for individual regulations. These numerous solutions result in more bespoke workflows, increasing application and maintenance costs. Moreover, firms are left with rigid regulatory workflows, which prohibit them from efficiently adapting to any new or changing regulatory standards to meet compliance deadlines.

Take the Markets in Financial Instruments Directive, better known as MiFID, as an example. Originally created in 2004 and taking effect in 2007, its intent was to standardize rules across the various European jurisdictions. It applies to client data collection, best execution, and reporting requirements, primarily in the equities markets. As in many other cases, the financial crisis of 2008 exposed some of the limitations in the original directive. The revised Markets in Financial Instruments Directive (MiFID II) and the accompanying Markets in Financial Instruments Regulation (MiFIR) were introduced by the European Union in 2014 and went into effect in 2018. MiFID II is a full-scale replacement of the original MiFID rules and greatly enhances regulatory coverage in many ways, some of which are detailed below (Source).

  • MiFID II expands the scope of covered instruments to include commodities, fixed income, derivatives, ETFs, and foreign exchange.
  • Organized Trading Facilities (OTFs) have been created as venues to execute non-equity products such as derivatives, bonds, and structured finance products. Liquid instruments are required to trade on OTFs, Multilateral Trading Facilities (MTFs) or Regulated Markets (RMs).
  • Trade reporting standards were introduced to expand on transparency requirements for executed transactions across the instruments in scope. Publication of these trade reports are done through a newly created Data Reporting Service Provider (DRSP) type called an Approved Publication Arrangement (APA). Trade information is shared in near real time.
  • Transaction reporting requirements were also extended for instruments in scope. Firms are required to submit full trade details to National Competent Authorities (NCAs). However, firms are allowed to submit these transaction details to Approved Reporting Mechanisms (ARMs), which ultimately deliver to the NCAs. Transaction details are required to be reported as quickly as possible and no later than the end of day on T+1.

Key Challenges of Regulatory Reporting

Firms face a variety of challenges with accurate and efficient regulatory reporting.

Poor Data Quality
The primary issue that firms have with trade and transaction reporting is poor data quality. Recent fines from the Financial Conduct Authority (FCA) on global banking institutions is in the tens of millions of pounds and has certainly raised eyebrows across the industry. The FCA specifically cited transaction reporting errors in the hundreds of millions over a ten-year lookback to the start of MiFID I. Indications are that regulators will continue to be aggressive in terms of MiFID II reporting errors.

Siloed Enterprise Knowledge
Source data has been managed traditionally in silos by business lines across a wide variety of vendor-supplied and home-grown systems. Generally, there is poor understanding of the data sources across the workflows and how the data is transforming from hop to hop. Knowledge is siloed with subject matter experts (SMEs) in particular systems, and firms have limited transparency into the entire workflow. There is a lack of end-to-end (E2E) lineage or traceability on the actual data. Current static data governance models cannot bridge the gap.

Inability to Track Data Across E2E Workflows
Another challenge of transaction reporting is the number of new data elements that the regulation required to be submitted. There were roughly 50 new fields introduced by MiFID II that firms needed to incorporate into their reporting infrastructure. In numerous cases, the data simply did not exist. Firms had to update reference data stores to include Legal Entity Identifier (LEI) processing and each system in the workflow needed to source these new fields. It’s understandable that data quality would suffer as a result.

Timeliness and Flexibility to New Regulations
Finally, all regulatory change initiatives are time-critical by nature. Regulatory fatigue is a real phenomenon as firms struggle to process multiple regulatory initiatives simultaneously. The costs to comply with these regulations on time are high. Firms must interpret new guidance and changes to existing rules. The next step is applying these functional and technical updates to existing systems, potentially implementing new platforms, and testing the E2E workflow. Successful outcomes, judged by data accuracy and timely delivery, necessitates solution flexibility and thorough understanding of current workflow health and data quality.

MiFID Compliance Requires Effective Data Governance

The key to a successful regulatory reporting function is a data governance framework that allows firms to build out a foundation that supports data quality improvements, workflow health measurements, and E2E lineages on the actual data moving through the pipes. Organizations must be able to trust that the data they are sending to regulators is complete, consistent, correct, and timely. With an effective data governance model, firms have the ability to trace the trades and transactions sent out to APAs, ARMs, and NCAs, back to their original sources. By being able to trace data through its lineages, firms can more easily and efficiently conduct root cause analysis. This leads to a swift resolution of issues and the avoidance of fines for non-compliance. Accurate measurement of KPIs and SLAs in close to real time for each hop in the workflow highlights issues in straight-through processing (STP) and pinpoints areas for improvement and additional investment.

By implementing effective and active data governance, firms have a better grasp on their ability to meet rapidly changing regulatory requirements, ensure data quality throughout the pipeline for better root-cause analysis, and address any weaknesses to both avoid penalties and make safer business decisions.

PeerNova’s Cuneiform Platform: Active Data Governance

PeerNova’s Cuneiform Platform is an active data governance tool that enables firms to meet regulatory requirements. The platform solves the key challenges that MiFID II and other regulatory reporting regimes present to financial institutions.

Provides E2E Data Quality
To ensure ongoing data quality, Data Quality and Timeliness Rules are perpetually run on live data. The platform’s E2E lineages quickly identify data quality and process issues, and address them immediately. Firms gain confidence in the data they are sending to regulators.

Active E2E Lineages Provide Workflow Transparency
The platform is an active data governance tool that enables E2E trust and transparency of data and business flows. PeerNova’s Cuneiform Platform provides the ability for all processes, workflows, and expertise to be captured as part of its active E2E lineages.

Auto-Generates Dictionaries, Glossaries, Catalogs, and Rule Repositories
With complex reporting requirements, it is key that solutions have a flexible set of tools to simplify and automate the reporting process. PeerNova’s Cuneiform Platform automates the generation and maintenance of the foundation of a firm’s data management and data governance frameworks.

Integrates with Existing Tools for Quick Deployment and Flexible Implementation
PeerNova’s solution integrates with existing tools, applications, and infrastructure, for quick deployment and flexible implementation. This seamless integration provides fast deployment of new features and emerging applications. The solution provides agile architecture that supports the scale of MiFID’s requirements. The solution combines existing data management and governance tools with additional capabilities to automate regulatory and risk reporting.

While many firms have tactically addressed the immediate needs of regulatory reporting regimes across the globe, many are still struggling with the quality of trade and transaction data submissions. Implementing an active data governance solution will allow firms to ease their regulatory burden by providing them with improved data quality and workflow transparency in a timely and cost effective manner.

To learn more about how PeerNova’s Cuneiform Platform can help your enterprise meet MiFID’s regulatory requirements, be sure to get in touch with us and request a demo today.

“MiFID II.” MiFID II, Link

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