On September 25, 2012, the Committee on Economic and Monetary Affairs unanimously agreed to introduce MiFID II to the European parliament. Since the approval from the European parliament the directive has undergone a series of approvals and ratifications, which ultimately concluded on the January 3, 2018 with its implementation.
With such an extensive lead time between the agreement date and its inception, many would assume the markets adoption of its requirements would have been easily managed and well within the required timeframe. However, reality has proven to be very different, with many market practitioners unexpectedly having to allocate incremental resources to MiFID II in 2018 to ensure compliance across all the requirements of the regulation.
Whilst the industry expects the regulators to take a pragmatic view on its ability to meet the required standards as of January 2018, the need for many firms to reallocate or extend resources for MiFID II to work well into the first half of the year will have a detrimental impact on other work that was expected to benefit from the completion of MiFID II and the associated availability of business analysists and project managers.
There is no single reason why the industry has struggled to meet the deadline, however, many believe the challenge to be compliant in time is largely as a result of a limited initial impact analysis and sub optimal solution design, that ultimately resulted in the industry under resourcing and poorly designing the target operating model and road map that was required to meet the complexity of MiFID II.
Consequently, projects expected to start early in 2018 utilising the resources freed up from the completion of MiFID II will be affected. Such a project is the Securities Finance Transaction regulation (SFTR), where the creation of an impact analysis and target operating model are required so that firms can plan their solution design and budget correctly so to meet both the expected start date of the regulation and change their operating model to align with new practices and behaviours in the market that will be adopted as the industry complies with SFTR.
SFTR is a wide-ranging regulation that impacts many areas other than securities financing. If a treasury department uses repo to fund itself or a derivative desk uses repo to hedge its interest rate risk, these businesses will need to be SFTR compliant. Firms needs to undertake a detailed analysis of their businesses to ensure they have captured all areas that are impacted by SFTR and only once this analysis has been completed can the target operating model be created.
Over the last 6 months The Field Effect (TFE) has analysed the requirements of SFTR for all market practitioners and modelled this in our proprietary system. Whilst many would expect facets of a firm such as data, technology, controls and process are heavily impacted, we also captured meaningful change across functions, services and people. All these facets are interrelated and need to be considered when building for regulatory compliance.
It is evident SFTR is more than a data transfer and matching challenge and without a comprehensive review of its impacts across a firm, any budget plans and associated resourcing levels may be proven to be grossly inaccurate which in turn will result in deadlines being missed and budgets overspent.
Meeting the MiFID II deadline has proven to be a tougher challenge than most expected and with the complexity of SFTR being potentially understated it is imperative that the industry embarks on a comprehensive impact analysis so ensuring that budgets are accurate, and the resources required are understood and accounted for.
For the industry to adopt SFTR in 2019, 2018 is the year of both analysis and build and this needs to start with immediate effect. Those that create a well designed target operating model will benefit from a robust future state infrastructure and will be well positioned to take advantage of business opportunities as the industry changes the way it transacts.
Written by Simon Davies, senior consultant and SFTR specialist at The Field Effect. Davies joined The Field Effect after nearly 20 years working in investment banking, with experience in securities finance and collateral management, prime brokerage and depositary banking, including process change, outsourcing, client and relationship management, and business development roles.