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Mifid II: Why Outsourcing Reporting Should Not Come Back to Bite the Buy-Side

From investors wanting more bang for their buck to increasing responsibilities for MiFID II transaction reporting, asset managers are facing challenges on all sides at the moment. Of course, the ultimate goal is to deliver absolute returns for their investors, but delivering these returns in the face of an investor shift to passive and against the backdrop of regulatory complexity is no easy task.

Where to turn for help with MiFID II

This two-pronged compliance and investor challenge has led many to turn towards that age-old cost cutting solution – outsourcing. Currently, firms are looking at what aspects of their business they want to outsource, and what they want to keep in-house: some are even considering a hybrid model for certain aspects. According to recent research from PwC, over two thirds of European asset managers have already outsourced various reporting functions.

But while the function can be delegated, the cold hard truth is that the responsibility for accurate and timely MiFID II transaction reporting is firmly back in the court of the asset manager. With this in mind, how exactly do investment firms continue to manage reporting efficiently while staying compliant and providing value to investors?

There is no simple answer, but the first thing asset managers need to do is get to grips with the exactly how MiFID II affects them. Once the rules come into play, the industry will witness a whole new array of classification schemes, which will require asset managers to restructure their reporting processes. At the heart of this is the need for new data sets. These can range from new reference data, to instrument-level definitions. For example, a portfolio manager may have to show a complete audit trail of trading positions that have been taken for a complex bond instrument. This could include a vast amount of detail such as who has contributed to the price, and information regarding why the price hasn’t moved significantly over time. If this wasn’t enough, proof as to when and for how long the bond could be considered liquid, also needs to be documented.

The problem with legacy systems

The problem is that asset managers are sitting on underlying technology infrastructure that simply cannot cope with this vast amount of information. A rethink is required, and firms will need to decide whether to consolidate their existing systems, or if they have already pursued a centralized model, how close are they to achieving that. This will determine the data connections that they will need to source, and deliver to the various Approved Reporting Mechanism (ARMs) and Approved publication arrangements (APAs) outlined under MiFID II.

Outsourcing has had, and still has, an important role to play. However, since the pressure is now predominantly on the asset manager to report, having data all in one place and being able to use it across the business is perhaps that best way to meet the MiFID II obligations. After all, it’s the critical relationships between data sets that best prepare fund managers to answer the key questions from a reporting perspective. Did the price spike due to IPO or takeover rumor, or did it fall because a rating dropped for an issuer? As asset managers continue to come under scrutiny from investors and regulators alike, now may just be the right time to fully centralize data reporting in order to concentrate on what they do best – manage portfolios and deliver returns for investors.

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