One of the more significant changes introduced by the Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) is the expanded requirements for recordkeeping. Firms are required to have consistent mechanisms to capture, retain and reproduce complete records of all services, activities and transactions on both firm and client accounts, inclusive of telephone calls and electronic communications.

Voice & Electronic Communications

Preparing for MiFID II & MiFIR Recordkeeping

2 | Preparing for MiFID II & MiFIR Recordkeeping

In this first white paper from our MiFID II series we explore Directive 2014/65/EU (Article 16) and outline the revised voice and electronic communications recordkeeping requirements, making recommendations for a comprehensive archive platform approach to recordkeeping. 

Executive Summary

Background to MiFID IIThe Markets in Financial Instruments Directive 2004/39/EC (MiFID) came into force on the 1st of November 2007 as part of the European Single Market Programme. As a European Union (EU) law it was designed to harmonise regulation for investment services across the 31 member states of the European Economic Area (EEA). Its main objectives are to increase competition and consumer protection in investment services.

Following the global financial crisis in 2008, the European Commission (EC) decided to review the MiFID framework.

In October 2011 it published proposals for a revised Directive (MiFID II) and a new Regulation (MiFIR) with the aim of making financial markets more efficient, resilient and transparent, and to strengthen the protection of investors. The legislation also needed to be updated to keep pace with the growing complexity of technology and financial innovation. In April 2014 the European Parliament and Council reached an agreement to adopt the updated rules and the Markets in Financial Instruments Directive 2014/65/EU (MiFID) together with Regulation (EU) No 600/2014 (MiFIR) was created.

The Directive and the rules will apply in full from January 3rd 2018 – the EU trading community’s deadline for compliance.

2007

2008

2011

2014

2018

Preparing for MiFID II & MiFIR Recordkeeping | 3

Who does it impact?

What Are The Key Points?

The European trading community (buy and sell side) will be impacted to varying degrees. This includes banks, asset managers, brokers, hedge funds, trading platforms (liquidity platforms), financial institutions and independent financial advisers.

Depending on the scope of their operations, market participants will have to put in place measures and systems to meet the new requirements.

Although the directive is driven by European regulators, it will nevertheless have a global impact. Capital markets are increasingly global, so it’s impossible to contain regulation

Ensuring financial products are traded on regulated venues by extending the number of financial instruments covered by trading rules.

Adapting rules to new technologies by introducing controls on high frequency trading.

Increasing transparency with new requirements that apply before and after financial instruments are traded.

Limiting speculation on commodities- a financial practice that can lead to the prices of basic products (such as agricultural) soaring -by introducing a harmonised EU system setting limits on the positions held in commodity derivatives.

Strengthening the protection of investors by introducing robust organisational and conduct of business requirements.

GLOBAL IMPACT

within geographic boundaries. When Asian and American firms do business with European customers, MiFID II will necessarily impact those interactions.

4 | Preparing for MiFID II & MiFIR Recordkeeping

Voice and Electronic Communications Recordkeeping

One of the protections MiFID II introduces, with its overarching emphasis on improving investor protection, is a set of far more stringent requisites in terms of communication, disclosure and transparency. This section will explore the specifics of these requirements.

The fundamental operating requirement that MiFID II firms face and the importance of why is clearly outlined in Article 16 of the directive.

“An investment firm shall arrange for records to be kept of all services, activities and transactions undertaken by it which shall be sufficient to enable the competent authority to

1. fulfill its supervisory tasks,

2. perform enforcement action and;

3. ascertain that firms have complied with all obligations to clients, potential clients and the integrity of the market.”

The MiFID II rules governing electronic communications and telephone conversations are much broader than the previous MiFID I obligations. MiFID II instructs firms to include not just communications that conclude in a trade, but all those calls and communications that are intended to conclude in a trade.

MiFID II Organisational Requirements Recital 57, Article 16 (7)

Expanded Governance

“Records shall include the recordings of telephone conversations or electronic communications relating to, at least, transactions concluded when dealing on own account and the provision of client order services that relate to the reception, transmission, and execution of client orders.”

“Such telephone conversations and electronic communications shall also include those that are intended to result in transactions concluded when dealing on own account or in the provision of client order services that relate to the reception, transmission and execution of client orders, even if those conversations or communications do not result in the conclusion of such transactions or in the provision of client services.”

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Gone are the days when privately owned business equipment (such as personal mobile phones) and contracting staff are exempt from the rules. Firms must ensure that electronic communications and telephone calls on both privately owned and firm issued equipment are being retained, for permanent and contracting staff.

Firms are obliged to retain records for 5 years, with some jurisdictions dictating 7 years, and be able to provide records where requested by the client or National Competent Authority.

Records should be stored in a durable medium that allows them to be replayed or copied and must be retained in a format that does not allow the original record to be altered or deleted. This supports the general recordkeeping requirements under Article 51 of the MiFID Implementing Directive.

”The records kept in accordance with this paragraph shall be provided to the client involved upon request and shall be kept for a period of five years and, where requested by the competent authority, for a period of up to seven years.”

All-Inclusive Communications

Retention Periods & Presentation

”For those purposes, an investment firm shall take all reasonable steps to record relevant telephone conversations and electronic communications, made with, sent from or received by equipment provided by the investment firm to an employee or contractor or the use of which by an employee or contractor has been accepted or permitted by the investment firm.”

”An investment firm shall take all reasonable steps to prevent an employee or contractor from making, sending or receiving relevant telephone conversations and electronic communications on privately-owned equipment which the investment firm is unable to record or copy.”

6 | Preparing for MiFID II & MiFIR Recordkeeping

The sheer scale of the MiFID II legislation, and its associated regulations, present many complex areas for firms to address, including a myriad of new organisational and reporting requirements. Some of the requirements are still to be finalised by the European Securities and Markets Authority (ESMA) but with the MiFID II recordkeeping requirements as ‘knowns,’ firms would be best placed to take immediate and definitive measures to prepare and install a responsive compliance program.

Taking into account that MiFID II demonstrates a more rigorous climate of oversight and enforcement, the first thing firms should consider is to understand what the regulators will look for in a formal examination, or, worse, when they knock on a firms door unannounced. Expect the ‘request’ to include all records under MiFID II Article 16, proof of supervision, disclosure and event reconstruction.

Secondly, with the above in mind, and the implementation date and electronic communications and voice recordkeeping obligations clear; By January 3rd 2018 firms should be in a position to archive, supervise and disclose all their electronic communications, including voice, from any device, personal or business. Firms will be best served by a single, comprehensive archiving solution to satisfy the full scope of requirements.

Electronic Communications include

• email• instant message platforms• enterprise social platforms• personal social platforms

MiFID II Article 16(7), subparagraph 7

• Acknowledges that orders can made through ‘other channels’.

• Communications made by ‘other channels’ must be in a durable medium and include the

Considerations for In-Person Communications

MiFID II Recordkeeping Preparation Voice and Electronic Communications

• mobile phone texts• collaboration tools• web sites See Smarsh all-inclusive content types

documentation of client orders made at meetings.

• The content of relevant face-to-face conversations with a client may be recorded by using written minutes or notes.

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A comprehensive archiving solution, that captures, enables supervision and disclosure from one system eliminates the challenges of managing multiple, fragmented messaging systems, records-retention schemes and inefficient search. Instead, firms are able to not only address the new, rigorous electronic communications and voice recordkeeping obligations but are also prepared to manage more data types and a higher volume of data in the most consistent and efficient manner, and are able to readily fulfil data requests that may come from clients or regulators.

A Comprehensive Archiving Solution will

• Ease the burden of monitoring business content• Automatically flag potentially risky content• Enable firms to quickly take action and remediate policy violations• Apply legal holds & implement retention policies

The FCA urges firms to start planning for the changes now before the

• EU implementing legislation is finalised• Treasury makes changes to the financial

services legislation• FCA make changes to their Handbook

To see more FCA advice on MiFID II, click here.

For all firms that are active in European financial markets, whatever size and type of business, there is no time to lose. Delaying risks running out of time and leaves open the possibility of non-compliance.

To learn more about how Smarsh can help firms prepare for MiFID II compliance, call 0800 048 8612 or click here to request a demonstration.

The next white paper in the MiFID II series will focus on internal implementation preparation steps.

• mobile phone texts• collaboration tools• web sites See Smarsh all-inclusive content types

What’s Next?

• Provide a forensically sound and immutable audit trail• Identify trends and improve supervision efforts • Provide a flexible team-based review structure

Portland | New York | Los Angeles | Boston | Atlanta | London

Smarsh delivers cloud-based archiving solutions for the information-driven enterprise. Its centralised platform provides a unified compliance and e-discovery workflow across the entire range of digital communications, including email, public and enterprise social media, websites, instant messaging and mobile messaging. Founded in 2001, Smarsh helps more than 20,000 organisations meet regulatory compliance, e-discovery and record retention requirements.

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