Although there has been significant focus on the front office and trading impacts of the MiFID review, there are a whole host of middle and back office concerns to consider. Reference Data Review speaks to Chris Pickles, head of marketing for Financial Markets & Wholesale Banking at BT, about his perspectives on these challenges.
There has been a veritable cartload of regulatory papers issued as part of the MiFID review process, but what are the headline issues in your opinion with regards to changes that will compel technology investment?
The key issues include best execution: investors are not necessarily receiving the best result, and it has become clear that it is not possible to see what is happening in all of the different execution venues. This means that transparency has to be improved, and this is also needed in order to manage risks effectively. Investment firms clearly did not understand the risks that they have been taking, as evidenced by the economic crash, and investment firms will have to make changes in order to manage risks better
Investment firms must make investments to address these issues, preferably as part of industry-led initiatives, otherwise market regulators and/or governments will mandate changes that will force investment.
How challenging will it be to meet the new requirements of the directive in terms of its extension to the OTC markets?
Very challenging, as these requirements do not increase revenues or profits for investment firms, which would normally be their priority. The changes are also leading in the general direction of increased transparency across more asset classes – not just simple equities – and most firms do not have infrastructure in place to cope with this today.
Where will firms likely be compelled to focus their efforts first in terms of compliance?
Transaction reporting – making sure that the regulators receive the data that they are supposed to receive. There have been some major fines imposed recently by the UK Financial Services Authority (FSA), for example, on firms that have not done this properly – or at all.
Trade reporting – joining in an industry led initiative to provide a European Union consolidated tape, rather than waiting for a regulator mandated approach, which is likely to cost the whole industry more money still.
Risk management – firms have to bring down the level of risk that they take on in order to meet their capital adequacy requirements. Real-time risk management across financial markets operations is therefore business critical.
Is the consolidated tape just a way of bringing down market data fees or could it potentially have a beneficial impact on the market overall?
Investment firms, and in particular investment managers, clearly want to bring down the total cost of accessing all of the data that they need in order to meet their “best execution” obligations. Currently the prices charged by data sources that are in a “strong market position” in the EU are not controlled or regulated by any independent authority (unlike in the US). The EU’s aim is to be a single consolidated market, and MiFID has been the strongest single move in that direction for financial markets since the EU was created. One of the benefits that can come from this is the greater adoption of open industry standards to help the EU financial services industry become more cost effective and competitive, and achieving greater adoption in a shorter timescale than would normally happen as a result of gradual market migration.
Is a consolidated tape achievable across Europe? If not, why not and if so, how should the industry and regulators go about implementing it?
Yes, a pan-EU consolidated tape is achievable. Exchanges worked on this concept 20 years ago, though that project (PIPE) collapsed due to competitive issues. It will need regulatory enforcement to ensure that it happens, and soon. But it should be an industry led initiative to meet the regulatory requirements, rather than a technology solution defined and operated by regulators. Regulators have indicated that this is also their preference, and they very much want to work with the industry to help to achieve an industry led solution.
With regards to reference data, will the second iteration of MiFID likely succeed in tackling some of the underlying client and counterparty identification challenges?
The MiFID review will help to underline the key issues for the regulators (these were originally pointed out to regulators before MiFID came into force), but it may not be possible for a pan-EU solution to the reference data issues to be achieved immediately as a result of this review. The reference data issues have a much broader impact than on financial markets institutions alone, for example on corporates globally.
How will changes to the post-trade data requirements of MiFID impact firms’ back offices?
They are likely to speed up the pace of business operations. While the front office uses sub-second measures for its processes, the back office has tended to measure processes in days. Post-trade data publication and risk management are now both real-time issues. Reducing the “time” element in the risk management equation helps to reduce risk and reduce costs, as well as generally improving customer service levels – all key goals of investment firms today.
Post-trade data standards are a big issue for the market, how should the industry help regulators to shape this debate?
By involving regulators in the development of standards, and by regulators accepting that they must be involved in this process in order to regulate markets cost effectively. Regulators such as the UK FSA have in recent months made it very clear that they wish to work with the industry to achieve the right results, including in the area of standards.
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