In my last blog, I explored the intricacies of timestamping under MiFID II. A natural next step is to take a closer look at the monitoring and reporting requirements the directive will introduce. These requirements impact both the investment firm and the venue and will require the use of highly sophisticated technology. MIFID II is not just driving change in operating models but also in the technological tools needed to operate in this new landscape. Ensuring compliance will currently mean a fragmented approach, but that need not be the only answer. There is potential for a model which uses “best of breed” solutions and an overarching vision of what needs to be done. Given the complexity and scope it’s difficult to know where to focus, so I’ve looked at a couple of areas that need to take priority when evaluating the best way to comply.
The trade reporting burden
In the case of trade reporting, all firms must report post-trade data to APAs (Approved Publication Arrangements), which will then consolidate this data to distribute to market participants. This brings challenges in itself. Being able to report data in a timely way requires a considerable amount of effort and expenditure. The phrasing of the directive places a burden on all participants to invest in technology to report post trade data at the speeds required. Indeed, the transmission of the data is the last step in a process which involves a whole host of procedures that many firms do not currently employ. The data needs to be collected, if it’s not in the correct format then it has to be converted. It needs to be checked, cross-referenced and timestamped all before it goes to the APA. This must all be done within 15 minutes of being received, dropping to five minutes in 2020.
At the other end of the pipe, the APAs then have to consolidate that data, check it and make it available to subscribing participants in “as close to real time as technologically possible”. APAs must also build infrastructure which is capable of receiving and handling vast amounts of data (including from high frequency traders) and time stamp it to within one millisecond.
MiFID II’s monitoring requirements don’t stop there – algorithmic trading comes under special scrutiny. Algo traders will have to comply with onerous reporting requirements and safeguards. Investment firms must be able to track which algorithm generated which trade and be able to cancel unexecuted orders. Each algorithm must also undergo thorough pre-live testing and all trading systems must be highly robust and redundant. These infrastructures must have sufficient capacity to reliably operate at a minimum of twice the highest volume of messaging and trading conducted in the past six months.
Non-algo traders do not escape entirely unscathed either; they have their own set of monitoring requirements, essentially expanded and strengthened from MiFID I. Recordkeeping is extended to cover non-equity instruments, and will stipulate that investment firms must reconcile their own electronic trading logs in real time with other trading counterparties such as trading venues and brokers through Approved Reporting Mechanisms (ARMs). Electronic trading communications must also be recorded and stored for a minimum of five years in a form that is readily accessible by the regulators.
It’s clear that markets are facing what could be an almost complete re-engineering of the systems that keep them functioning, and with precious little time to make it work, despite delays. The question is what can participants do to make it as simple as possible to comply?
Untangling the spaghetti
Clearly a huge technological burden is being placed on all capital markets participants. MiFID II simply states the desired outcome and the markets are expected to create and implement systems to produce them. Because all these requirements are diverse and, at the same time, have much in common, many firms would assume that it’s possible to implement one product or solution to cover all reporting requirements.
This isn’t the case – at least not yet. Many systems exist but they only address segments of the regulations. Market surveillance systems have been in place for some time now, and ensuring adequate storage is a matter of increasing capacity. ARMs have been set up to take care of trade reconciliation and reporting and pre-live algo testing systems are starting to become available. What’s difficult is piecing all this together into a comprehensive, cohesive compliance system in a way that’s as painless as possible.
Firms have a choice between buying point solutions and then integrating them in house, or engaging a partner to manage that process. In either case, there is no one complete solution, and perhaps there shouldn’t be. The requirements are so wide ranging and affect so many parts of the business it’s unreasonable to expect one platform to be able to cope with all the regulations. Rather, by taking the most appropriate solution for a specific problem, each firm will be able to construct a solution that both fulfils requirements and works for the business.
Greater than the sum of its parts
There is the potential for firms who understand this fragmented approach to MiFID II technology to join forces to create a set of solutions which remove the headache of system integration. This would reduce the pain for participants and do away with the need for lengthy RFP processes and demanding in-house integration projects.
By setting up this wider partnership framework, it’s possible to provide the best solution no matter what the situation. As well as being commercially viable for the participating vendors, this solution has the potential to massively reduce the pain and expense of complying with MiFID II. It’s a model that’s been used by systems integrators for decades now, but has fallen out of favour due to the recent decline in the number of “change the business” IT projects.
MiFID II has the potential to force the resurgence of these large, all-encompassing implementations and while no one company has the complete answer, there are companies which can solve a part of the problem very well indeed. Perhaps this partnership model will shine a light on the best path to compliance.