Compliance with European MIFID II regulation: the new MIFID engine

Technology Reply was called upon to contribute to the creation of the Bank's new MiFID regulatory engine.

Scenario

As part of its programme to bring a well-known and important Italian banking company in line with the European MiFID II regulation, Technology Reply, its historical partner, was called upon to contribute to the realisation of the Bank's new MiFID Regulatory Engine.

In particular, the aim of this project was to evolve the current process of verifying the appropriateness and suitability of the Bank's customers' dispositive transactions, adapting them to the current European MiFID II regulations.

The new suitability model has maintained some choices and characteristics of the previous model adopted for basic advice, evolving mainly towards the adoption of new risk assessment metrics at portfolio level, such as credit risk, market risk and minimum holding time.

Technology Reply's task was therefore to enable the integration of all the Bank's device systems with a market-leading product in the regulatory engine segment through the creation of a decoupling layer capable of orchestrating the collection and manipulation and composition of the information necessary for the invocation of the back-end adequacy verification engine in which the adequacy and appropriateness controls of the Bank's new adequacy model are carried out.

Solution


The main objective of the project, in addition to regulatory compliance, was to keep the integration interface of the New MiFID Engine in line with that of the Old Engine as much as possible, with the aim of inducing the least possible impact on all the Bank's systems integrated with it and guaranteeing a non-regression test phase on device processes that was as secure and robust as possible.

To achieve this purpose, Technology Reply took care of the implementation aspects of a back-end business service (realised through J2EE, EJB, Oracle Database, Oracle OSB 12c and JMS code technologies), invoked by all the Bank's channels, which was entrusted with the task of enriching the input received with all the information necessary for the new suitability model (thus bridging the gap with the old model), which was ultimately realised through the integration of market-leading third-part solutions. This enrichment concerned the client's personal details, the relative Personal Profile derived from the completion of the MiFID questionnaire, the portfolio and the financial instruments handled with relative management costs (entry, exit and running costs).

Furthermore, this back-end service also implemented a mechanism for managing error messages in the event of a negative outcome of MiFID checks that is fully configurable, scalable and modifiable without the need for application releases, so as to normalize the messaging displayed to the end customer and centralize its management.

Lastly, Technology Reply also dealt with the implementation of all the components that carry out the periodic massive MiFID audit performed on all the Bank's clients to verify the suitability of their consolidated portfolios and produce, quarterly, half-yearly and yearly, the statements and reports required by the current European MiFID II regulations.

The project lasted about two years, and since this MiFID engine is core and invoked for every transaction executed by the Bank's customers from any channel, the related ROLLOUT in Production phase initially involved a small subset of the Bank's end customers, which gradually increased until it was opened to the entire customer base, in compliance with the timeframe shared with CONSOB for the adaptation of its suitability model to the European MiFID II regulation. Moreover, the progressive rollout of the initiative was organized in the following 3 phases (managed through a customer-side profiling mechanism on the back-end services side):

  • The first phase in which the invocation to the new suitability verification service was redirected to the old MiFID engine, returning the relevant outcome, so as to verify the correct integration of all channels with respect to the new service interface in terms of request and response.

  • The second phase in which the call to the new suitability verification service was redirected to the old MiFID engine, returning the relative result, and in parallel and in asynchronous mode, by means of a JMS queuing mechanism, the suitability verification operation was also submitted to the New MiFID Engine, so that, by means of extractions of the respective databases, business users could compare the checks performed and the relative results of the two engines to verify and adapt the metrics of the New MiFID Engine.

  • The third phase in which the call to the new suitability verification service was redirected directly to the New MiFID Engine, returning the relevant outcome (pilot phase).

Benefits

The integration interface of the New MiFID Engine realized in line with that of the old engine allowed to reduce the impacts on all the Bank's systems integrated with it and to guarantee a safe and robust non-regression test phase on the Bank's processes.

In addition, the implementation of a fully configurable, scalable and modifiable error message management mechanism in the event of a negative outcome of MiFID checks without the need for application releases made it possible to normalize the messaging exposed to the end customer between the different channels and to centralize its management.

Finally, the gradual rollout of the initiative in three phases enabled the new suitability model to be enabled to the Bank's entire customer base with a safe approach that mitigated any integration and tuning issues of the metrics on which the controls performed by the new suitability model are based.