Regulation is rapidly becoming the catch phrase in the financial markets these days – either in the form or more rules or fewer – but the buy- and sell-side are carefully watching and planning for whatever the powers-that-be will conjure up next. After all, isnt more regulation the answer to the markets perceived woes?
The marquee regulation that is on everyones tongue is the Markets in Financial Instruments Directive (MiFID II) framework for the European Union designed to improve upon the original provisos mandate to improve the functioning of the financial markets and strengthen investor protection. It goes into effect January 3, 2018 and traders expect its effects to be felt not just in the EU but in many other geographies, including the US.
In a conversation with Traders Magazine, Julie Hutchinson, Head of Solutions, North America, Capital Markets, at Colt Technology Services explained that anyone trading European securities, with presence in Europe or servicing clients based in or trading in Europe is impacted by MiFID II. The regulation, she reminded, applies to a wide range of participants in capital markets, not only the sell-side, with implication on people in such firms.
The regulation goes beyond equities to cover a wide range of asset classes with implications on how such asset classes are being traded. As such, some asset classes will see new trading models that participants have to be ready for, Hutchinson said. The regulation covers pre-trade, trade, and post trade. As such, the entire trade flow needs to be reconsidered. Global firms have the even more difficult task of ccomplying with regulations in different jurisdictions. In some cases, such regulations are at odds, and even if they are not, such firms still need to come up with an efficient response to regulatory requirements to avoid spiraling regulatory and compliance costs.
The problem though is that such costs in most cases do not add anything to the top line, she added. A side effect of the regulation is that some global firms have developed tools that can help with MiFID II regulatory requirements, and hence the industry might see new business models causing competition from participants in the market.
How are U.S. capital market firms specifically bracing for MiFID IIs requirements and impacts?
Hutchinson said Colt is working with firms at varying stages of readiness. She told Traders Magazine the list includes; those that have many of the technical and infrastructure upgrades already in place and are waiting for the final clarifications to make any final tweaks; to firms who have allocated additional funding for Infrastructure, IT projects and connectivity to new venues (such as APAs); to those that think the mandate is going to be pushed out further and their approach is to wait and see.
We suspect that firms in the last category might be in a mad-scramble come the fourth quarter, so we have been taking steps to add content and software service providers to our Colt PrizmNet community so firms (as well as late adopters) will be able to implement by a simple connection into the extranet – delivering fast time to market.
So how can these financial extranets help traders manage large volumes of market data across vast geographies, and deliver upon MIFID reporting requirements?
Hutchinson explained financial extranets provide increased connectivity and a global reach which is something firms complying with MiFID II will need as they connect to many more new destinations (including publishing and gathering content from APAs) which could increase the need for extranets and providers who can aggregate connections.
Also, not all markets are within the same datacenter or even the same metro – think London, Stockholm, Paris, Frankfurt, she said. Based on the Colt fiber reach, we also can provide connections to those locations and venues that have BCP or DR sites in other cities (outside of the metro) or in customer owned and operated datacenters.
In the U.S., Colt utilizes the Securities Industry Processor or SIP. However in Europe, there isnt a single consolidated feed to use and make things simple.
In order to prove best execution, a trading firm is going to need to connect to all the venues to get an accurate picture of the entire market. Having all the key exchanges and datacenters that house large pools of liquidity, connected with scalable and resilient links and the lowest latency is going to be key, Hutchinson said.
And this is where the extranets shine, she added.
Extranets also provide increased bandwidth and capacity. MiFID II requirements create a need for increased bandwidth, as there will be a lot more trade data to process and store in a timely manner. The need to process and store that data in a timely manner lends itself well to moving some of the data to the cloud, as well as using AI or Machine Learning [to manage it], Hutchinson explained.
But what about securing all this trade data being sent between compliance and reporting teams via technology deployed in the cloud? In this age of cyber-attacks and hacking, firms need to ensure their information is encrypted and that they know exactly who their counterparties and vendors are and what they are doing as well.
Firms need to understand what trade and transaction activity needs to be reported and by when,” she explained. They also need to understand who is expected to do the reporting and to whom. One these items are determined, firms need to look at their current work flows and think of efficient solutions. Some reporting solutions are following new deployment models such as cloud models. Firms need to understand how to interface with such models, and what is the best way of reaching them, i.e. thinking of their workflows and connectivity needs.
Also, Hutchinson added that US firms, while not directly mandated to comply with MiFID II, might want to start looking at ways to test new content and delivery systems in a post-MiFID II environment.
Trading firms will be required to test new products before introducing them into the market to ensure market stability. For example, fully testing algorithms in a controlled environment before putting them into production and properly monitoring to avoid a flash or crash, Hutchinson said.