The new MiFID II regulations are making many more reporting demands of hedge funds, not least of which is how to embed the new regulatory reporting standards within their operational processes. It is a lot more difficult than it looks on paper. Below we look at some of the issues funds need to consider, when to ask for outside help, and what sort of internal technological solutions are on offer.
Proper management of data sits at the core of any strategy designed to help your firm to report effectively under this new regime. The MiFID II Directive, for example, covers all financial instruments traded anywhere in the European Union, including via any EU broker. Everybody that provides data as part of a trading cycle that touches on the EU is affected by the directive. For US brokers, providing a venue to EU trading counterparties means that they too fall within scope.
The important first step is to get past the belief that such reporting can be managed manually. It can’t and it won’t be over the long term. Human errors will occur and a firm will find itself in technical breach of regulations. The automation tools are already available to make these processes something that hums along in the background, to be referred to only when you need to. Without this realisation by hedge funds, the regulatory risk of a breach will be a constant risk, and it will be a potent one.
On top of this, consider the proposition of traders manually calculating their position limits. How is this going to work in practice?
Wading through the new regulations is a huge task. This is why we advise clients to retain a regulatory expert in the first instance who can advise on a firm’s exposure and help it to develop a requirements document.
Not all hedge funds will be large enough to have access to internal compliance resources, but it is important that a compliance specialist is able to take a close look at what the investment business is doing, and to develop an understanding of who all the parties are that are likely to fall into scope.
There will be many questions that need to be answered at this part of the process: who are your buyers and sellers, who is who and who is doing what, and most importantly who is in scope? What should you be reporting and when?
This is also a good opportunity to develop a clear picture of your balance sheet. This is usually a straightforward process but you will need to have an understanding of which instruments on that balance sheet are covered by MiFID reporting requirements. A compliance advisor will be able to help to map this out.
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