What does it take to develop a RegTech solution to help businesses comply with MiFID II?

MAP FinTech’s new product helps businesses deal with the EU’s complicated Markets in Financial Instruments Directive (MiFID II). However, developing it was far from easy.

MiFID II is a difficult piece of legislation to get your head around, which is why many businesses struggle to comply with the law. The financial services industry has spent €2.5bn to implement the changes and regulators spent around 30,000 pages and 1.5 million paragraphs just to explain it.

So when the law came into force in 2018, several firms struggled to implement it. “Many companies faced significant problems due to this new regulation’s complexity, failing to grasp several of its best execution components and the relevant checks required to comply with their obligations,” Andreas Savoullis, regulatory analyst at MAP FinTech, the RegTech company focusing on ensuring compliant reporting, tells RegTech Analyst.

The best execution component he is referring to is the part of MiFID II that stipulates that investment firms must have a policy in place to ensure they are executing clients’ orders to the best of their abilities. These policies have to be constantly monitored to ensure their effectiveness.

“If it appears during the monitoring process that the firm’s best execution policy is ineffective, said policy has to be adequately adjusted,” explains Savoullis.

Not only did MAP FinTech notice that many firms struggled to understand MiFID II, but also that the ones who did manage to wrap their heads around it had problems to implement the law. The implementation simply required too many resources.

“As a result, we identified a gap in the market for an automated solution and designed this innovative product, one that is comprehensive and cost-efficient and complies with all regulatory requirements,” says Savoullis.

“Keep in mind that complying with the new regulation’s obligations requires active participation from a firm’s compliance, technology and operations departments, as well as senior management. Moreover, even if the companies had sufficient resources to allocate to this new requirement, it would still have been very difficult to properly comply with the law’s requirements.”

Recognizing the demand for a way to help businesses comply smoothly with MiFID II was the starting point of the development of MAP FinTech’s new Best Execution Monitoring service.

And it is easy to see why this would be a potentially great business opportunity. Compliance management is a huge part of the RegTech market. Companies that offer compliance tools like the Best Execution Monitoring service have comfortably attracted between 14.8% and 20.1% of all the investment going into the sector since 2014, according to RegTech Analyst’s research.

The new tool is a fully automated solution that provides effective monitoring and has more than 40 checks for execution arrangements.“Based on our market research, even those companies that already had something in place were only able to manually perform a maximum of five to six checks in a time-consuming and wasteful way,” says Savoullis.

He explains that the service’s effective “monitoring capabilities focus on all of the relevant qualitative and quantitative metrics, [including] price, cost, speed, likelihood of execution, settlement, size and nature of the [trade.]” It also covers all transactions, instruments and asset classes. “Even with unlimited resources, this is practically impossible to be done manually,” Savoullis argues.

A key part of the solution is that it is able to provide concrete proof of a company’s monitoring efforts and flag potential risk of best execution failures.

Moreover, the solution is provisioned for ad-hoc investigations and has the ability to flag best execution failures. Moreover, it can be integrated with multiple data sources – everything from databases to APIs.

But going from idea and initial concept to finished product is never easy. “After conceiving the idea, we had to analyze the MiFID II regulatory requirements and fully understand what was expected from market participants,” reveals Savoullis. To meet this challenge, the MAP FinTech team had to both understand the letter of the law as well as the spirit behind it.

MAP FinTech also had to deal with several restrictions imposed by trading systems in terms of storing data, bridging the legislation with industry practice and ensure there was an equal understanding of the subject matter among the company’s different departments.

“Our vast experience in regulatory reporting, consulting and compliance helped us overcome most of these difficulties, Savoullis says.

Another challenge to overcome along the way was to convince companies to change their practices in order to fall in line with the new regulation. To this end, MAP FinTech’s technology experts offered robust solutions for data retrieval from several sources, including trading systems, business intelligence systems and files among other things, for integration, using multiple options to meet each company’s standard practices.

MAP FinTech also took measures to ensure the new solution was also compliant with the General Data Protection Regulation (GDPR), which Savoullis says “posed a significant challenge, yet we tackled it very effectively.”

“Last but not least, certain technical challenges, such as the processing of the vast amount of data involved in the project, were also dealt with in an efficient manner via the design and hosting of the solution on a highly scalable, robust and secure infrastructure,” he continues.

During the production, the team also worked on the presentation and visualization of the results using analytics and graphs to present them in a modern, user-friendly and intuitive way.

“Finally, in order to maximize the tool’s effectiveness and ensure its usability and efficiency, we closely collaborated with a few large, well-known and established companies operating in the sector,” says Savoullis. “This allowed us to work with real data during all phases of the project, including requirements analysis, design, implementation and testing.”

The finished product was unveiled at a breakfast event in early June in Cyprus, where MAP FinTech is headquartered. Representatives from over 70 investment firms and the Cyprus Securities Exchange Commission (CySEC) attended the event.

“[The] reception was incredible with more than 100 demos requested and presented to interested companies, and many of them have already become our valued clients,” says Savoullis. “Furthermore, via the Innovation Hub initiative, CySEC also showed great interest in having a demo at its premises to learn about our solution’s full capabilities. Feedback was very positive and participants even provided recommendations on how to further enhance the system and its checks.”

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