MiFID II, MiFID II:Articles

MiFIDII ARMs and Systemic Risk: Time for the Penny to Drop

By Breige Tinnelly, Head of UK Sales, AQMetrics

The UK’s Financial Conduct Authority (FCA) is urging firms to make their final decisions about their choice of Approved Reporting Mechanism (ARM) providers soon and with very good reason. The new regulatory reporting requirements, which mandate reporting across a wide range of asset classes, impact this coming January with the implementation of MiFID II. For financial service firms opting to go with an ARM for their reporting requirements under MiFID II, choosing which vendor to partner with should be a top priority. So what are the main issues  to consider when selecting an ARM?

Expect the unexpected

Firms should recognise that the responsibility for ensuring they have resilient transaction reporting procedures in place ultimately rests with them, not with their vendor. In fact, the FCA has advised firms to factor in potential systemic, operational and even security risks when selecting third-party vendors including which ARM they choose.

The issue of systemic risk is often overlooked but needs to be considered. With just four months to go before final implementation, the FCA has expressed concern that too many firms are currently reliant on too few vendors in the market, some of whom hold significant market share for Regulatory Reporting.

Robust compliance

A number of market participants impacted by MiFID II share the FCA’s concerns.  Many are taking steps to mitigate the perceived risk by backing up their primary choice of ARM with an additional provider, to fulfil their reporting obligations. In the unlikely, but not impossible, event of major failure, firms should not expect that the regulator will take this into account when faced with a potential breach of compliance. The market impact would be far reaching, but even so the onus is still on the individual firms to demonstrate that their systems and processes were robust including their choice of third-party vendor.

In addition to the larger firms and asset managers looking to contract with both a primary and a back-up ARM, many are also looking ahead to what the post-Brexit scenario might entail, i.e. will they be impacted by not having passporting rights into the rest of Europe if they are solely reliant on a UK-based ARM? Some smaller firms may feel at risk of becoming just a number with a larger vendor and that in the event of any problems, they might not be the immediate priority. This is one of the key benefits of adopting a partnership approach to transaction reporting, which is made possible by opting for a primary and backup ARM.

Systems and safeguards

Of course, operational considerations are also significant in making an informed choice, including classification of what is reportable or non-reportable, exception handling etc. ultimately, knowing that what you are reporting is correct.  

The risk of non-compliance amounts to more than regulatory fines, it is your data, your customers and your brand that are at risk.  

At AQMetrics, our comprehensive solution encompasses an efficient user interface, automated data validation, data analytics and an approved reporting mechanism, to deliver economies of scale to our customers while still maintaining information and cyber security, data management, analytics and regulatory reporting. Whether acting as a primary ARM or in the role of backup ARM for regulatory reporting under MiFID II, firms choosing AQMetrics can rest secure in the knowledge that they are covering off the risk inherent with choosing a vendor and ensuring regulatory reporting compliance come January and beyond.