MiFID II/R: a strategic case for reengineering the role of operations

April 2015 | EXPERT BRIEFING | FINANCE & INVESTMENT

financierworldwide.com

In today’s dynamic business environment, the financial regulatory landscape is a main disruptor, alongside digitalisation and customer experience personalisation, obliging investment banks (and other financial services firms) to revise their business and operating models through strategic initiatives. Within this financial regulatory landscape, MiFID II/R, coming into force no later than 3 January 2017, is a cornerstone of the financial markets reform in the European Union. As raised by ESMA’s chairman, Steven Maijoor, at the ICMA Annual General Meeting and Conference in 2014, “MiFID II/R introduces the biggest overhaul in the EU financial markets in more than a decade”. MiFID II/R will drive fundamental changes in the securities market structure across the full lifecycle of products and services. Indeed, it will extend the scope of MiFID I and will impose new requirements across: market structure, pre- and post-trade transparency, commodities, investor protection, governance and risk management, and third countries.

Whilst being comprehensive in terms of the impacted areas, and therefore burdensome in terms of requirements and costs, it will involve more than just a compliance exercise. MiFID II/R is a tipping point in the cumulative effect of the financial regulatory landscape. Therefore, investment banks (and other financial services firms) will need to reflect upon MiFID II/R’s major strategic repercussions and how these are interacting with other financial regulations. Turning the burden of this landscape into a performance tool for gaining competitive advantage will require, inter alia, investment banks especially to reengineer the role of operations. A reengineered role of operations will lead to three core opportunities, namely an increased long-term efficiency ratio, a robust strategic narrative, and a differentiated customer-centric offering. However, reengineering the role of operations will also face three core challenges, namely the cultural legacy, the traditionally fire-fighting approach of operations, and the talent shortage.

Selecting the opportunity

To seize more growth opportunities in tomorrow’s financial regulatory landscape, investment banks will need to reengineer the role of operations from a ‘passive executor’ to an ‘active stakeholder’ role.

Traditionally, the role of operations consisted of executing orders. In addition, operations has been considered a cost centre and as such has been subjected to outsourcing part of its functions to centres of excellence. Yet, since the global financial crisis, operations has played a vital role in ensuring that investment banks (and other financial services firms) are compliant with the ever-changing and rising burden of financial regulatory compliance. Given that financial regulatory change is a top challenge identified by the boards of investment banks, it is paramount to reengineer the role of operations. Operations should therefore become a main stakeholder with a decision power over the strategic narrative of the investment bank.

Operations has a distinctive advantage in improving the investment bank’s efficiency ratio and in identifying its core capabilities and its sources of competitive advantage. This distinctive advantage is even more relevant in the context of the current financial regulatory landscape and MiFID II/R especially. Indeed, these will oblige investment banks to undertake a target picture to ensure a holistic approach to tackling financial regulation. This will drive down both implementation costs and time. It will also enable operations to consider the constraints and opportunities for designing new financial products and services.

This distinctive advantage will also enable operations to further help investment banks develop a suite of profitability measurements that are more balanced, long-term and granular. Such measurements would support investment banks in identifying the contribution of profit from different business activities and would also account for their long-term strategy and for the sustainability of their business model. Operations is therefore a very appropriately placed main stakeholder to assess the actionability and achievability of the investment bank’s strategic narrative.

Reengineering the role of operations will enable investment banks to operate in a less siloed manner and follow a less-fragmented decision-making process. As such, investment banks will be able to enhance their holistic anticipatory capabilities for reducing risks and seizing opportunities, and for leveraging the potential of big data. Leveraging big data is especially important for tailoring differentiated customer-centric offerings and for reinforcing their risk management capabilities.

Executing the opportunity

Reengineering the role of operations will face several challenges and most of them are rooted in the cultural legacy of the investment banks’ organisational structure. One of the main challenges comes from the fact that investment banks are managed according to a portfolio approach, therefore encouraging a strong division. Hence, to reengineer the role of operations, investment banks will need to put in place a strongly committed leadership function capable of fostering and cascading a coherent vision across the different business divisions. In addition, this vision will need to be accompanied by an effective communication plan with clear lines of responsibility and accountability across the different business divisions. Investment banks will also need to help foster a new culture and engage the mid-managerial layers over the different business divisions to ensure the sustainability of this strategic change program. Overall, given the strong presence of a cultural legacy, the end result of a complete reengineering of the role of operations will follow an iterative process as opposed to a linear one.

Operations is itself also facing some key challenges from the reengineered process. In the past, operations has been a fire fighter, putting in place tactical solutions to financial regulatory requirements. Hence it has not really nurtured its capacity to anticipate changes, nor has it proactively derived the risks and opportunities arising from these after the event. Operations will need to adopt an ‘opportunity seeking’ type of approach which will ensure that its insights as an active stakeholder are future-oriented. Another challenge currently facing operations is ensuring that it will attract the best talent in the future. Therefore, investment banks will need to launch a war on talent both internally and externally. However, this will be effective only if operations manage to send a convincing message across of being an active stakeholder within the strategic narrative of the investment bank.

Conclusion

MiFID II/R, alongside the wider financial regulatory landscape, will require investment banks (and other financial services firms) to reconsider their business and operating models. Reengineering the role of operations into an active stakeholder is a robust strategic initiative for enabling investment banks (and other financial services firms) to sustainably revise their business and operating models. In other words, this strategic initiative will enable these impacted firms to become more adaptable to changing conditions and to secure a long-term leading position within the market.

Alexandra Dobra is a senior associate at Kinetic Partners, a division of Duff & Phelps. She can be contacted on +44 (0)78 4119 9101 or by email at alexandra.dobra@duffandphelps.com.

Alexandra Dobra

Kinetic Partners, a division of Duff & Phelps