2012: The year that financial institutions get serious about regulation?

By: Tony Moulange - 05/12/2011

Tony joined Colt as Senior Business Development Manager in July 2009 with responsibility for the financial services vertical. He is working with global clients and liquidity pools on their low latency and algorithmic trading infrastructure.

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Looking back on 2011, it certainly seems that this is the year that regulators finally flexed their muscles, concluding with the FSA handing out a record £6m fine to a private investor for market abuse but the question remains as to whether all financial institutions have really got the message.

There's no doubt that today's high speed trading culture means that the growth in cross product, cross market trade volumes, will lead to a continued debate around how the industry is regulated in 2012. As the volume of trading shows no sign of slowing, regulators will certainly continue to keep a close eye on any financial institution that is deemed to be manipulating the markets. This year we have seen institutions that have failed to deploy the necessary measures to keep up with regulatory changes in the market, despite the high profile fines shelled out. For example, the CME Group hit a trading firm with an $850,000 fine this week, for an algorithm that went wild and resulted in large sums of oil futures being purchased in quick succession.

Against this backdrop of high profile cases and eye watering fines, most leading investment banks, exchanges and brokerage firms are already getting their houses in order to comply with pending regulations, such as Dodd-Frank Act in the US, and now the EU's Markets in Financial Instruments Regulation (MiFIR). Following on from MiFID, MiFIR is a new financial regulation coming into force in 2013. Critically, this is a 'regulation' not a 'directive' to financial institutions, like MiFID. Despite the long lead time before implementation, all financial institutions will need at least a year to realign their trading strategies, which means that this must now be a priority if it is not already. The growth of competition in trading and clearing will also gain further impetus when MIFiR comes into force; in particular, in the equities market, which has fragmented after the entry of several new trading platforms this year. More competition for providing market infrastructure increases the need to apply a consistent regulatory approach to different providers and ensure the correct trading standards are maintained in this fragmented environment.

The result of new regulations such as MiFiR will see organisations being forced to trade exotic products, including interest rate swaps (IRS) and collateralised debt obligations (CDO), on new “lit” exchanges, with an increased requirement for transparency and reporting. This is even before any new prices and reporting traffic comes out of the exchange. Such regulation will trigger yet more market data flows around the world's financial markets in 2012. In parallel many of the leading financial institutions are looking to improve connectivity into new markets in order to minimise latency for transactions. As a result, the need for greater market connectivity to new exchanges is imperative.

In summary, while increased fines by regulators have been a good thing for market transparency this year, increased regulation will not stop trading firms finding new scope for business. Looking ahead to 2012, an approach of clear and concise regulation alongside greater connectivity into new markets is what both financial institutions and regulators should be striving to achieve.

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