If you’re in compliance, specifically with a Non-EU asset management firm, you may be prepared to sit back and enjoy the show that MiFID II has produced among those firms servicing clients in the European Union. It can be hard enough to keep up with the ever-changing landscape of regulations at home, never mind keep an eye on what goes on across the pond.
However, don’t get too comfortable just yet. With refinements being released as recently as July, MiFID II seems to always have something new in store. Compliance professionals need to understand the changes taking place in the front, middle and back office as well as the potential impact to the systems that support them. To some firms, this has meant strengthening the role of the compliance officer in anticipation of increased regulatory scrutiny.
So take a minute to walk through (or around) three of the potential pitfalls for non-EU firms. Or take 45 minutes, and watch IMP’s webinar, hosted in conjunction with the National Society of Compliance Professionals (NSCP). Following are three areas where increased compliance scrutiny may be warranted:
Account Onboarding: Onboarding new accounts may introduce new asset classes and classifications.
This may sound intuitive. However, at IMP we work with clients who have acquired new funds or entirely new lines of business, often encompassing new asset classes. One of the cornerstones of MiFID II is its expansion from equities to most other asset classes, particularly debt and derivatives. Determinations including account suitability and reporting will increasingly be driven, in whole or in part by security attributes.
Trade Surveillance: Be prepared to collect and maintain considerably more data about each MiFID II transaction.
Speaking of reporting, a major expansion of data is required from investment firms regarding the entire trade life cycle. This ranges from the time an investment is decided upon, even if it’s by an algorithm, through ensuring best execution standards are met, and allocations are fairly and appropriately made in the event of partial fills. If you’re in surveillance, you’ll want to make sure that the policies on which you have signed off have actually been implemented and are being followed every day.
Fund Classification: Review EU accounts and verify that they are properly classified
Protection of EU investors is a hallmark of MiFID II. In most cases, a trade that affects such an investor will be subject to the scrutiny of EU regulators. In some cases, what your firm considers professional accounts today can be reclassified as retail accounts under MiFID II in January 2018, which affects suitability and reporting requirements. A third classification under MiFID II is the Eligible Counterparty, which is specifically related to a firm’s status as a trade counterparty. Compliance teams will need to ensure each receives the appropriate protections applicable under MiFID II.
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