Transparency is the cornerstone of MiFID II. Whether it’s pricing, product or process transparency, participants will need to pull back the curtains to make more information public regarding the nature of their operations, products and services. Consequently, investment firms will need to know more about their clients than ever before, with very little margin for error – and doing this in the most efficient way possible is going to be crucial for getting MiFID II right first time.
From assessing suitability and appropriateness, managing client assets, best execution or reporting on transactions, MiFID II is introducing new Know Your Customer (KYC) requirements across firms’ operations that will significantly impact which clients they can interact with and how. These requirements mean more and more documentation is needed to compile a consolidated view of what they want to do – and are allowed to do.
As MiFID II spans the whole trading life cycle, the task of collecting and managing that data will be even more complex, and at the same time key to the overall client experience. According to Dan Matthies, Head of Entity Exchange, Bloomberg’s KYC solution, “the challenge for firms is to build a coordinated approach to collecting and distributing the information they need in order to comply.”
From an operational perspective, MiFID II is going to require firms to reconsider a number of key business decisions, including their commercial strategy with regards to product offerings, avenues to market and suppliers leveraged, as well as even more fundamentally, the sustainability of certain business functions such as investment advice, algorithmic or high-frequency trading.
Many of the consequences of this directive remain unclear, but taking into account the large expenditure that firms are likely to face reworking KYC process, repapering clients and reconfiguring systems, firms should consider focusing on implementing in the most efficient way possible. And while the regulation also gives firms an opportunity to enhance their services, gather more useful and accurate data and – most importantly – boost competitiveness, interpreting the KYC data and new client onboarding and reporting requirements in the right way will be critical to success.
These are four key areas to pay close attention to when implementing KYC processes under MIFID II:
Client suitability and appropriateness: New criteria for the suitability assessments of clients will now include clients’ “ability to bear losses” and risk tolerance. New documentation requirements will apply to certain types of counterparties. Suitability checks must be adaptable and client specific, which mandates a rule-based approach with automatic, parameterized suitability tests on a per-transaction basis. Suitability must be measured on different levels, both at an individual product and at a portfolio level, adding a layer of complexity. For example, a product may be suitable for a client on its own, but it may not be suitable when assessed in the context of the wider portfolio. So, if suitability criteria changes, such as client knowledge or risk tolerance, tests must be conducted in real time. Keeping the latest reference data will be of paramount importance.
Client classification: Amendments to the suitability regime require that clients be classified as either retail, professional or eligible counterparties, and repapered accordingly. The removal of certain exemptions for some entity types mean all existing customers will likely require a remediation effort in order to ensure they’re complying with the new rules.
Marketing controls: New marketing controls extend the suitability and appropriateness regime to prospective clients. Firms will need to understand the new client classifications before marketing more complex products.
Target market identification: New requirements to manufacture and distribute financial products to a pre-defined target market will require deeper knowledge about clients in order to ensure target market requirements are met.
Ultimately firms should be looking to leverage this inevitable regulatory spend to not only successfully meet the requirements, but to enhance the service they provide to their clients, gather more useful and accurate data and boost their competitiveness.
Find out how Bloomberg’s services and solutions are helping organizations prepare for MiFID II. You can also join JWG’s MiFID II LinkedIn group to keep up to date with the latest news and regulatory releases.
This article is a joint publication from JWG and Bloomberg.
JWG is made up of operations and technology professionals, trusted by the global financial services industry with expertise in regulatory change management. For the past decade, JWG’s team of independent analysts has helped the industry interpret large quantities of regulatory reform and action it in a smart and intelligent way.
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