MiFID II Compliance


The Markets in Financial Instruments Directive (MiFID II)


Implementation date: 3 January 2018.
MiFID II will replace MiFID and Part VIII Financial Services and Markets Act 2000 (FSMA).

Affected parties: Buy-Side and Sell-Side.
MiFID II regulates firms who provide services to clients linked to “financial instruments” (shares, bonds, units in collective investment schemes and derivatives), and the venues where those instruments are traded.

Scope: MiFID II intends to improve the competitiveness of EU financial markets by creating a single market for investment services and activities, to ensure a high degree of harmonized protection for investors dealing in financial instruments.

Key features of MiFID II and Behavox solution


Research unbundling


Requirement: the payment for the execution of services and the payment for research are separated. This will force buy-side participants to pay for all services, enhancing transparency, achieving best execution and best research.

Behavox Solution: Behavox aggregates and analyses all channels of communication automatically for all buy-side and sell-side interactions. All interactions are ranked on quality based on proprietary statistical models that objectively value advisory services received by the buy-side. Currently, two of the world’s largest hedge funds are using Behavox to automatically generate ranking tables for their commission payments.














Unwanted research


Requirement: if a firm does not want to receive research, reasonable steps should be taken in order to discontinue its receipt and consumption.

Behavox Solution: Behavox helps the buy-side meet its regulatory requirements by detecting if research was unwanted or if any benefit was derived from its use. To detect unwanted research, the Behavox platform uses preconfigured scenarios, which are statistical models, phrases and machine learning algorithms tuned to detect irregularities. The scenarios that detect unwanted research will vary in severity depending on whether a benefit was received or not.

Scenario 1: Research was unwanted and the PM/trader never replied.
Scenario 2: Research was unwanted but the PM/trader responded (even if he responded to say "no" to the research).
Scenario 3: Research was unwanted but it happens to be near a trade based on date and time.

All three Scenarios will be escalated to the compliance team via built-in Case Management interface. Note that all Scenarios use proprietary methodology and are optimized to reduce false positives (99% reduction in comparison to other systems).

Voice compliance


Requirement: firms must maintain good quality recordings of voice communications that are able to assist regulators in detecting inappropriate behavior and trade reconstruction.

Behavox Solution: Behavox integrates out-of-the-box with leading voice capture systems in the market, both established and new providers. Each voice file ingested into Behavox goes through automated “quality” screening that validates that the audio track is present and can be audible by human ear. Integration adaptors are built by Behavox using the most advanced streaming technologies to boost download speeds, which guarantees completeness of record keeping and timely download of files from the recorders.













Expansion of archive requirement


Requirement: records must include electronic communications (e.g., email, IM and fax), voice recordings of telephone conversations, and minutes from face-to-face meetings related to receipt, transmission and execution of orders on behalf of clients or on one’s own account.

Behavox Solution: Behavox platform is able to aggregate, archive and index more than 26 different data types in real-time including Bloombergs, emails, phone records and trading data. The list of data types expands with each client and we can provide ingestion diagrams upon request.








Retention and storage


Requirement: firms must keep all records in an immutable format, such as Write-Once-Read-Many (WORM). These records must be available upon request to clients and regulators for a minimum period of five years, and seven years if required by the relevant Regulator (Article 16, MiFID II).

Behavox Solution: Behavox system aggregates, indexes and archives data in a single repository, where records are retained in compliance with WORM storage requirements. In addition to WORM compliance, Behavox provides legal-hold capabilities with built-in Case Management for collaboration. Data is replicated 3x for resilience and is made available instantly in search results. All customer data is stored within customer's network and never leaves the premises. Behavox provides an Activity Log that documents all actions taken within the Behavox system and attests to the purity of content stored, enhancing and ensuring WORM compliance.

Trade Reconstruction


Requirement: buy-side market participants will have to comply with trade recording obligations and research remuneration from the pre-trade to post-trade and operations.

Behavox Solution: Behavox can store all information related to a trade and monitor all aspects of a trade lifecycle. Behavox provides algorithms that can be deployed to look for communications around a specific trade within a defined timeframe. Behavox search functionality allows firms to meet regulatory requests within defined time frames, such as 72 hours by NFA/CFTC. Currently, a large globally renowned hedge fund is using Behavox algorithms to meet trade reconstruction needs, and data retrieval for regulatory requests.




Governance


Requirement: a firm's management is required to define, oversee and be accountable for the implementation of corporate governance. They must ensure prudent and effective systems are in place to prevent any conflicts of interest that may harm the client’s interests or the market.

Behavox Solution: Behavox provides management teams with the ability to target communications and monitor the success of corporate governance. Behavox platform provides an effective way of highlighting risks of conflicts arising by focusing specifically on clients rather than generating irrelevant noise that would overwhelm the management team.

Conflicts of interest


Requirement: more stringent obligations are being enforced requiring firms to actively prevent conflicts and take the “appropriate” steps, as opposed to simply identifying and managing conflicts by taking “reasonable” steps.

Behavox Solution: Behavox provides a collaborative workflow in Case Management for triage, investigation and escalation of cases. Case management requires users to comment and justify actions taken on cases, which are stored in an accessible Case Management log. Cases are generated by preconfigured Behavox algorithms that proactively look for risks of conflict in communications.



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