While MiFID II is designed to offer greater protection for investors, and provide more transparency across asset classes, it also creates a tougher market to successfully operate in.

MiFID II covers equities markets, fixed income commodities, currencies, futures, exchange-traded products and derivatives such as CFDs; it affects us all.  Banks, fund managers, exchanges, trading venues, high-frequency traders, brokers, and pension funds.  Put simply, the increased regulatory burden can translate directly into a greater drain on resources if you’re not smart about how to tackle and manage it. 

With respect to starting a hedge fund, today’s financial environment creates a mighty challenge where margins are being squeezed.  The cost of office or desk space, accessing Bloomberg terminals, front end systems, increasing administration and compliance requirements, and salaries can often be a step too far for a hedge fund in its infancy, especially when investors are demanding lower fees.

Now is the time to take a logical approach by outsourcing as many operational functions as possible.  By freeing up time and reducing costs to focus on income in a fast-changing market can be the most effective solution to ensure a successful business outcome.

The MiFID II directive makes it clear that regulatory expectations are high when important operational functions are put out to third parties.  Yet the requirements for increased transaction reporting can be overwhelming and will drive an uptake in outsourcing.  It is therefore key that fund managers seek out an experienced outsourcing partner to collaborate with, and that is where a specialist firm comes in.

Outsourcing firms have been ahead of the MiFID II curve for some time now, providing solutions for those who MiFID II will mean a significant change to their business.  Paul Kelly, Chief Executive Officer at Linear Investments comments: “MiFID II will put huge pressure on small and medium sized funds – and even some larger entities.  Reporting requirements, proof of execution value, IT infrastructure, tracking and recording transactions are all an issue.  Client data, conversations and interviews, and administrative and management overheads in compliance and reporting will also be affected.  MifID II combined with imminent GDPR constraints on client data management will force many to look at outsourcing their operations, mid and back office, IT compliance and trading.”

Outsourcing firms package everything together using a MiFID and FCA compliant platform.  For smaller managers, the option to start off with a managed account that can be validated with an independently audited track record makes sense.  The manager will only pay brokerage fees (without paying for any fund structure) and when it has all its ducks in a row it can migrate the track record to a fund structure.

Outsourcing is a means of optimising the fund manager’s strategic business plan and managers should identify the outcome required from outsourcing as the first step towards finding the best solution.  Outsourcing has an impact on the efficiency of a business, as well as the bottom line.  Working with an outsourcing partner provides access to a larger pool of skilled resources, improved transaction quality, plus product and service innovation.  It allows the manager to focus on the core function of their own business and treat partners as an extension to their in-house team for everything else.

Information Technology is also proving a challenge under MiFID II and GDPR will further exacerbate this.  Outsourcing IT requirements and using an outsourcing infrastructure leaves the fund manager confident they are working within MiFID II regulations, without the headache of sourcing and managing expensive relationships with multiple providers.  This includes transaction reporting, best execution, call recording, market abuse oversight as well as complying with Global Data Protection Regulation (GDPR), which comes in to effect in May 2018.

Outsourcing works, with transparency and trust being a standard part of service delivery.  For a business considering outsourcing, change must be owned at the top level it is clear that more COO’s and CEO’s are understanding the benefits of outsourcing.

To contact the author:
Jerry Lees, Chairman at Linear Investments: [email protected]