MiFID II: Outreach and ‘Repapering’
Are You Prepared for MiFID II Outreach and Repapering?
Co-authored by Darren Thomas, managing director and head of Counterparty Manager at IHS Markit
and Brie Lam, director of Regulatory & Compliance Services at IHS Markit
With the clock counting down to MiFID II compliance, impacted dealers and other financial institutions are steamrolling ahead to prepare. Regulatory change management leads within these firms face multiple workstreams in managing the path to becoming compliant with the wide-encompassing Directive. In managing timelines to adherence, dealers should bear in mind that one facet of MiFID II compliance – one that directly impacts their ability to continue to trade with a given counterparty following MiFID II implementation on 3rd January 2018 – has a dependency on factors that lie outside of the dealer’s control. Client responsiveness and agreement to a host of new Directive-mandated terms of business (“terms”) will drive the timeline-to-compliance as much as the bank’s own preparedness.
This isn’t the first time the industry has embarked on a repapering effort, yet it feels like a completely new challenge. On the heels of having set up similar outreach processes to adhere to large-scale variation margin requirements for non-cleared derivatives, dealers can benefit from lessons learned and apply them to MiFID II terms adherence:
- Begin the outreach process early.
The process will likely take longer than expected. Navigating to the relevant client contacts at each client organisation; allowing for a reasonable response time; anticipating client questions around terms; and recognising that a subset of clients will want to negotiate salient points, as opposed to taking an automatic “sign-and-return” approach, particularly around terms that involve a dealer’s execution policy or trading off venue on behalf of its client, should all be built into timeframe estimates.
- Leverage automation and outsourcing with regards to per-client adherence.
Outreach-oriented regulatory tools and services can facilitate the terms-adherence process across a dealer’s client base. Capabilities that include furnishing a pre-existing database of regulatory-relevant client representatives; providing centralised tracking for outreach personnel; sending auto-generated follow-up emails to unresponsive clients; generating rules-based system prompts for clients to upload specified types of supporting materials, where needed; and provisioning of customisable, client classification-specific terms to be sent out form elements of an effective terms-repapering solution. Additional features including e-signature capability and centralised client query entry enhance the client experience, and further support terms adherence.
- Provide transparency to clients.
Some clients will use this as an opportunity to re-open the entire customer agreement. However, to meet the deadline, provide your clients with transparency into what is required to achieve compliance with the Directive, and why specific terms must be updated.
- Adopt a phased approach to terms-adherence.
Rather than outreaching to all clients in one attempt, begin the outreach for terms adherence in waves of clients. The inputs for client segregation into waves of outreach will vary per dealer, and are likely to include considerations such as revenue-generation impact of the client, existing client classification, and the likelihood of a particular client segment wanting to negotiate away from stock terms.
Terms-repapering will be a significant undertaking for all investment firms subject to MiFID II adherence, more so for dealers where the client base is substantial. Firms need the right technological tools and appropriate client data as well as client contacts in place to expedite this task. This, coupled with well-trained staff and a carefully-planned approach, will help to lighten the load.
There are three key areas where action is required.
Some material changes have come out of ESMA’s review of algorithmic trading.
A consolidated tape will significantly improve transparency and create a level playing field.
AFME said there should be mandatory free data contribution to the consolidated tape.
The review is an opportunity to recalibrate MiFID II regulations post-Brexit.