Implications of MIFID II on Financial Technology Infrastructure and Data Warehouses

While implementation is not likely until 2014 or 2015, the repercussions of MIFID II are already eliciting mixed reactions from market players. Some industry regulators such as the UK’s Financial Services Authority (FSA) has already expressed concerns on substantial liquidity withdrawal from the UK’s derivatives market due to provisions that prohibit brokers and bankers from using their own capital during trading.

But even as market players grapple with the pros and cons of the new regulation and how it relates to their business processes, one area that is unlikely to escape major impact under the new regime is the technology infrastructure and data warehouses of financial organisations.

The MIFID II headache for financial firms primarily lies with the scope of products that fall under the new regulation’s umbrella. Some of the asset classes in the MIFID II basket include derivatives, commodities, emissions allowances and structured deposits.

Whereas some financial organisations and data providers may already have had a harmonised data warehouse infrastructure that can adequately capture these disparate products, many others will be forced to carry out extensive changes to their systems. The ‘unlucky’ ones are staring at nothing short of a complete system overhaul in order to reorganize how they manage information.

Bad News for Some, Good News for Others?

No financial organization that will in any way be touched by MIFID II regulation will escape incurring some form of technology cost in order to comply. But whereas compliance (including transaction reporting and publishing transparency information) will hit the bank’s and data providers purses, the IT industry on the other hand will be drooling at the prospect of new business opportunities.

Overhauling data warehouse infrastructure will not just be good news for the IT service providers. It will also raise the profile of the financial organization’s CIOs as they lead the charge to get their organisations ready. Also joining the gravy train will be staff who already have proven experience in successful change management as well as demonstrable expertise in back office integration/migration. IT personnel that have a good understanding of financial markets and process flows will be a highly sought after skill too.

The reign of MIFID I has been short (implemented in November 2007) but many financial services players had already aligned their process flows, applications and infrastructure to comply with this initial directive. For such organisations, getting the technology ready for MIFID II is probably going to be easier than for those starting from scratch.

But it will not be a walk in the park either. For instance, a bank that was already compliant with MIFID I may have acquired a MIFID II-relevant subsidiary that places new regulatory reporting and risk management demands on it. A re-appraisal of the products that the new organisation handles will be necessary to ensure the current data warehouse infrastructure can effectively handle MIFID II requirements.

Commodity traders are on the other extreme as they do not enjoy the benefits of falling under MIFID I. Setting up the requisite technology infrastructure from scratch may seem like the only option. That being said, commodities trading firms may also be able to shorten the data warehouse and technology infrastructure implementation process in a way that banks realistically cannot.

Compared to banks, commodities have a relatively homogeneous product offering and this is bound to reduce the number of format conversions and interfaces necessary to make the enterprise data ready for the data warehouse.

In-House versus Outsource - 3 Factors

To say that many banks, commodities traders and data providers have both the IT and regulatory competence to undertake the implementation of a MIFID II-compliant data warehouse and technology infrastructure is largely factually correct. But implementation is one thing - world class implementation is entirely another.

Ultimately, financial organizations must perform a candid assessment of their current staff to determine whether they have the wherewithal to execute a MIFID II technology infrastructure to the desired standard. Three factors will inform an organisation’s decision whether or not to look outside for help. First, existing staff may not possess all the skills that are required for a project of its complexity. Tapping a proven consultant to help steer the ship would in this case be a feasible alternative.

The second trigger for sourcing external support is when the staff are highly competent in all respects but are so bogged down with day to day responsibilities that it would be unrealistic to expect them to competently perform both their BAU (Business-As-Usual) obligations as well as give quality attention to the MIFID II implementation project.

The third factor is where nothing short of the complete overhaul of existing systems is needed for the organisation to be MIFID II-ready. In this case, the competence of in house staff alone will not be sufficient. Guidance from the vendor(s) of the new system(s) and data warehouse during and just after implementation will be key before the organisation is left to navigate the waters alone.

Managing Technology Implementation Costs

Getting the technology infrastructure ready for MIFID II will cost money. But it does not mean the costs have to spiral out of control. Adhering to best practice project management and process improvement standards such as PMBOK, PRINCE2, ITIL, CMMI and Six Sigma can help shore up implementation efficiency and bring down overall costs.

Another tactic would be to stick to the process preparation only for now without pumping much capital into setting up a new data warehouse and other associated technology infrastructure. With the ongoing debate on the merits versus demerits of MIFID II and implementation hovering around 2015 (maybe beyond?), it is still too early to invest too much cash in new data warehouse technology.

It makes more business sense to wait until a little closer to the implementation date when the regulation’s provisions will have crystallized and no radical changes are expected.