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The Trading Mesh

Miffed with MiFID

Wed, 16 Sep 2015 05:23:16 GMT           


By Nigel Farmer


Last week FOW hosted a regulation event in London with presentations and panel discussions covering a range of topics with a strong focus on Mifid II


With submission of the final draft of ESMA’s regulatory technical standards (RTS) being delay by three months, there was much concern over the challenging deadline. Many firms have already started implementation of yet to be finalized rules in order to be compliant come the 3rd of January 2017. There was also a lot of discussion over the cost of compliance. With many additional firms such as principal traders now falling under the classification of an “investment firm”, the cost of regulation was seen as prohibitive, with compliance not just restricted to MIFID II but also capital adequacy requirements under Basel III for example. There was a fear that the cost of compliance would lead to many firms leaving European markets and operating outside of the remit of ESMA. This could have a large and negative impact on liquidity, a sense backed up by a recent report by the Toulouse School of Economics.


Benchmarks have featured heavily in the news in recent times with the LIBOR, gold and FX fixing scandals amongst others prompting action from the regulators. Changes in benchmark administration are causing some concern though, particularly the increased cost to administrators, which is causing smaller firms to pull out of providing these services. The proposed code of conduct for benchmark administrators will make contributors legally responsible for their submissions. In the wake of the recent scandals this would seem to be a good idea, but there are concerns that some firms will stop making submissions, which will have the undesired effect of reducing market transparency. There are particular concerns in the commodity markets where global benchmarks are commonplace and the impact such a code may have on participants outside of the EU, and their willingness to participate in submissions.


Talking of codes of conduct, there was a very interesting discussion on Culture and Conduct, with panel representation by the FCA, who will produce a revised code of Market Conduct this autumn. Barry king of the FCA stated that “We need more thought by trading practitioners to think about how assets can be abused… Firms need to educate staff as to what they can and cannot do – there’s a clear role for education”. Such education is required both on the front office and within compliance, particularly as the need for surveillance spans across more and more asset classes. Culture though plays a big part, with companies in the past perhaps turning a blind eye or rewarding those who flout the rules. This sets a bad example to new recruits on the trading floor, leading to poor practices continuing long after the old guard has moved on. The general consensus was that the smaller firms would find it easier to adapt, but on the flip-side smaller firms may be less strict on compliance issues. For the newly classified “investment firms” education may be more of an issue than culture, since they will not have been subject to the regulation previously. However with  criminal sanctions coming into force as part of CSMAD and liability extending to firms and not just individuals, we will surely see a change in conduct in the coming years.


Data was deemed to be the MIFID II sleeper topic in that many firms have not yet started addressing requirements in this area.  Transaction reporting under MIFID II extend the number of fields to be reported from the current twenty three to eighty one. These reporting requirements will require the aggregation of data from many additional systems and may also require systems to be modified to capture data not currently available. With some firms already struggling to correctly report whether a trade was a buy or a sell   the new requirements are sure to be problematic for some.


This brings me on to technology. With much tighter budgets since the financial crisis, compliance has been eating into a significant portion of IT spend and will continue to do so, particularly for those firms previously falling outside of the “investment firm” classification. Systems integration will be key for many areas such as transaction reporting, but flexible platforms such as complex event processing will also play an important role – platforms that can be adapted to changing or non-finalized regulation and which can be used in multiple areas of business such as surveillance, pre-trade risk, best execution and algorithmic trading, all of which are under the MIFID II microscope. A common though amongst FOW panelists was that regulation can also be a stimulus for innovation and these technologies can be a breeding ground for innovation that simply cannot be achieved with a closed-box application based strategy.


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