The introduction of MiFID legislation in 2007 and the global financial crisis of 2008 sent the world into disarray and changed the financial markets as we knew them. Once the dust settled, these key events eventually resulted in increased competition and greater protection for consumers across investment services. With the impending launch of MiFID II just around the corner, this state of flux is picking up pace again, this time driving technological as well as systemic change across the financial sector.
The road ahead
These regulatory challenges are now affecting a wider section of the financial ecosystem. Where MiFID I had changed the marketplace for equities, MiFID II is set to extend this legislation to a broader range of asset classes including fixed income, derivatives and commodities. Once MiFID II comes into force, firms will not only need to store records of every trade and transaction, these will also need to be reported and, in the case of trades, in real-time. And all of this information needs to be readily available for auditing at any time should there be any suspicion of foul play.
Whereas in the past, buy-side firms could rely heavily on their brokers for compliance, under MiFID II, they will no longer be exempt from the obligation to report altogether, which presents new challenges for the buy-side. For some, it’ll be the first time that they’ll need to navigate their own way through the regulatory landscape.
As firms fall under this mounting pressure, and with 90 percent saying they wil be at a medium or high risk of non-compliance in January 2018, , more are looking to technology to guarantee transparency and comply with looming legislation. Enter ‘RegTech’ – a range cloud-hosted solutions and applications helping the financial sector with regulatory monitoring, reporting and compliance. These applications can streamline and manage activities like best execution and trade and transaction reporting, and record keeping, to name a few.
Extranet for the extra mile
As such, RegTech investments have tripled over the last five years with more firms seeking out these technologies ahead of MiFID II. Logistically, however, the proliferation of these tools and platforms means figuring out how to plug into several different APIs and manage the flow of data. This is a ‘one to many’, with data routing from a single RegTech application to many customers but also simultaneously, from a single customer plugging into multiple providers. These might be market feeds, exchanges or counterparties as well as RegTech platforms.
With data flowing from multiple sources and in multiple directions, there’s a lot to manage. Taking an extranet ecosystem approach can help capital markets tap into the services of a range of providers with relative ease, scaling up or reducing the use of particular applications in line with business demands.
This certainly makes life easier but extranets can also help with speed to market. For example, non-EU firms trading in Europe, who also have to be MiFID compliant, can plug into an extranet in Europe and immediately connect with RegTech fims.
With the launch of MiFID II fast approaching, capital markets firms need to make regulation a priority. As RegTech becomes more central to strategies for compliance, an extranet ecosystem can go a long way to smoothing what is already set to be a bumpy ride.
Are you ready to meet the complex requirements of the MiFID II directive? Watch the webinar to find out
Andy Young, Colt Capital Markets