Regulation will have a significant impact on the trading community this year with Markets in Financial Instruments Directive II (MiFID II) expected to present the most onerous challenges. Other regulations likely to cause headaches include the Commodity Futures Trading Commission’s proposed Regulation AT covering automated trading, the Market Abuse Directive and Market Abuse Regulation that take effect in July, and European Market Infrastructure Regulation, which is well past its deadline date, but is not yet working well.
The challenges and opportunities presented by regulatory initiatives were discussed during a panel session at last week’s A-Team Group Intelligent Trading Summit in London – you can join the discussion at A-Team Group’s next summit event in New York City in May. Andrew Delaney, A-Team chief content officer, moderated the session and was joined by Chris Donnan, chief technology officer at Tyler Capital; Nick Wright, chief operating officer, Europe, the Middle Ease and Africa at State Street Global Services; and Rachel Przybylski, head of market structure at Saxo Capital Markets UK.
Panel members agreed that regulation is based on good intentions in terms of investor protection, orderly markets and crisis prevention, but questioned the value of multiple regulations with the same intentions. Wright said: “I can see the logic behind regulations, but there is no sense in them all doing the same thing. We need transparency and timely reports, and we need one regulation not 20 that all vary slightly. We want to make the market more open, but what is happening is making trading more expensive and closing down the market.”
Donnan added: “Regulation threatens market liquidity. The combination of cost pressures on banks and constraints on trading make it hard to provide high quality markets, the opposite of regulatory intentions.”
Considering the overlap of regulations, Przybylski described the need to explore economies of scale, perhaps looking at different asset platforms and working out where it is possible to be agnostic across asset classes. She said: “We need to remove duplication in the trading cycle and to do this we need to look at what service providers such as utilities can offer.” Outsourcing was also discussed as a means of reducing internal pressure and allowing firms to concentrate on what they do best, but it requires control, can prove more expensive than envisaged, and often runs into local regulations that restrict the transfer of data between jurisdictions.
Focusing on MiFID II, Delaney questioned how the regulation is effecting the design of high performance trading systems. Answers to the question included the need to manage vast quantities of data from the front office to the back office, implement complex risk management systems and deal with data privacy issues raised by the requirement to identify people making particular trades. From a market maker’s perspective, Donnan noted message limits and capital requirements as problems posed by MiFID II.
Despite an ongoing lack of clarity around some MiFID II requirements and the possibility that the regulation’s compliance deadline may be pushed back a year to January 2018, panel members agreed that there is no time to slowdown MiFID II implementations and urged firms to work with what they have ahead of final clarification of the regulation’s requirements.