If there’s one thing that we can be sure of with the world’s financial markets, it’s that the regulatory landscape never stands still. And right now, we’re going through a particularly dynamic phase. Divergence between UK and EU regulation post-Brexit is high on the agenda, with the EU conducting its ongoing review of MiFID II & MiFIR and the UK’s Financial Services and Markets Bill (FSM Bill) currently making its way through Parliament. The FSM Bill implements the outcomes of HM Treasury’s Future Regulatory Framework Review (FRF review), which was established to consider how the financial services regulatory framework should adapt to be fit for the future, and to reflect the UK’s new position outside of the EU.
In the US, T+1 settlement is fast approaching. And operational resilience continues to be a hot topic, with the EU’s DORA legislation, aiming to introduce a harmonised and comprehensive framework on digital operational resilience for European financial institutions, coming into force in 2025.
In this environment, how can financial institutions best prepare their IT infrastructure and trading functions for further regulatory change and associated disruption?
This was the topic of discussion during a keynote ‘fireside chat’ at the recent TradingTech Summit in London, where Rachel Przybylski, Head of Trading Platforms Projects and Regulatory Quality Assurance, Trading Platforms and Core Technology at Man Group, conducted an on-stage interview with Virginie Saade, Head of Government and Regulatory Policy EMEA at Citadel.
Regulatory agendas of EU & UK
The conversation started with Saade describing the regulatory landscape as very ‘driven’, with the UK working fast on reforms aiming to make the UK a globally competitive, standalone market, and the EU looking to achieve the CMU (capital markets union) and a single rulebook.
She went on to explain how the regulatory agendas of both regions are driven by these respective aims.
With its goal of the CMU in mind, the EU’s ongoing review of MiFID II & MiFIR is crucial, particularly in light of the recent global pandemic and geopolitical instability. MiFIR’s transparency rules are being revisited in order to enhance execution quality, deepen liquidity, promote greater competition, and improve market resiliency. The EU has also been looking at issues such as the double volume cap; there seems to be a consensus towards simplifying it into a single volume cap, which would still limit dark trading but would be more straightforward to navigate.
In the UK, the FSM Bill was introduced into Parliament last year and is currently being reviewed. Complementing the Bill is the further list of 30 reforms that the Chancellor announced last December in Edinburgh, which are a central part of the UK’s regulatory efforts to “building a smarter financial services framework for the UK”.
Divergence, Convergence and T+1
Saade spoke of some of the problems associated with divergent regulations, i.e. that running duplicate processes and technology is burdensome and brings additional costs, which in the end have to be borne by the investor. However, she suggested that trading is converging and becoming more global, and organisations in different regions are working together committing to international standards (IOSCO) to better address geopolitical issues. Saade and Przybylski agreed that transparency, improving execution quality, and having better markets are the core underlying themes aiming at protecting investors that both UK and EU share deeply.
The issue of the upcoming move towards T+1 settlement in the US, and how it might affect the UK and EU markets, was then discussed. Saade pointed out that the UK Chancellor recently put in place an Accelerated Settlement Taskforce to consider some of the implications of T+1,and suggested that faster settlement may help tackle credit risk and market risk, as well as reduce the number of settlement fails.
Operational resilience
Asked how firms can prepare their IT infrastructure for future disruptions, Saade responded that there are always disruptions, and technology has to adapt constantly. She noted that the currently regulatory framework already has tools to help support resilient running of the markets. In MiFID II for example, there are rules around algorithms and how they should be tested, as well as how businesses should have continuity plans in place. There is an existing MiFID II legal framework that requires trading venues to have in place appropriate measures to ensure their systems’ resilience, have capacity to operate and provide an environment for orderly trading conditions.
However, there has been an increased focus recently from both ESMA and the FCA on the issue of outages on trading venues and the related impact on the trading process, particularly when a primary market is affected. Regulators are keen to work with the industry to make sure that trading can continue despite such outages.
Saade drew attention to DORA (the Digital Operational Resilience Act), which will become applicable at the beginning of 2025. While financial services firms are already likely to have Information Communications Technology systems and procedures in place, conducting their review and adaptation to DORA’s standards is likely to be a complex task.
The FCA and the BoE have been working on something similar in the UK.
What does the future hold?
Increasing competitiveness is a big focus for regulators both in the EU and the UK markets. As trading has become more global in nature, mostly because of the progress of technology, competition is not only taking place within the borders of Europe but on the global scene, with other very dynamic regions like the US or Asia constantly reinventing themselves. For ESMA, the European Commission, the FCA, and HM Treasury, the key to being competitive therefore is to be clear about what they want to achieve, and making sure all stakeholders understand that, in order to ensure their support.
One additional upcoming EU regulation that firms need to be aware of is MiCA (Markets in Crypto Assets), which is going through the approval process and is likely to come into force later this year and to become fully applicable in Q4 2024. The UK is also focusing on what the regulatory space for crypto assets should look like.
The conversation concluded with a call to action. Given that regulators and policymakers have the difficult task of balancing the protection of markets and investors while allowing for innovation and competition, Saade urged the audience to take the opportunity to engage with regulators and policy makers, whether through written consultations, by speaking bilaterally, or approaching them through a relevant trade association to share their views and experience.
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