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All Along the Watchtower: How MiFID II’s Impact on the Front Office Is Driving Banks to Mutualise

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By Dan Barnes

Bob Dylan’s lyric, ‘There’s too much confusion, I can’t get no relief,’ resonates in the world of capital markets. It encapsulates the relentless regulatory and systemic turbulence.

Under the EU’s Markets in Financial Instruments Directive (MiFID II) coming into force in 2018, firms active in Europe will be hit with many new layers of process over existing mechanisms and completely new activities.

Project Sentinel is intended to reduce the challenge this presents for banks in the over-the-counter (OTC) front office. OTC trading was virtually absent from the first MiFID in 2007 and its inclusion in the 2018 directive expands the rules to capture a range of instruments and activities.

“Sentinel is very focussed on leveraging open standards to allow interoperability of components within Sentinel and components that banks have in their existing systems,” says Sassan Danesh, managing partner at Etrading Software, which is running the project on behalf of the banks.

It intends to develop shared technologies that at once provide sell-side firms with a resource that can assist in MiFID II compliance while mutualising the cost of compliance. The group recently announced that membership had grown to 10 sell-side firms.

Fred Ponzo, managing partner at consultancy GreySpark Partners. “The really big banks have the economies of scale to make the investment to comply with MiFID II pay off; the smaller firms they are really struggling. Therefore, sharing the overhead across three or four would be advantageous, across 10 will clearly help.”

The potential of the model is not lost, even on larger firms. Mark Goodman, head of foreign exchange, rates and credit (FRC) direct execution services at UBS says, “Sentinel certainly has some value in the mutualisation of cost in the face of regulation. We aren’t part of it but we certainly keep an eye on it to see what it might do for us. We see cost pressures increasing on the sell side, we see increasing cooperation around ‘utility functions’ that do not offer a competitive advantage.”

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