Market opinion : MiFID II & Brexit : Jannah Patchay

April 19, 2018

REVERSING DIRECTION.

MiFID II may be grabbing all the limelight but Jannah Patchay, Markets Evolution argues now is the time to look at the Great Repeal Bill.

Following a cluster of European regulations going live at the outset of 2018, including MiFID II and PRIIPs, the industry has reluctantly turned its gaze towards Brexit. Depending on your point of view, it’s the stuff of either dreams or nightmares.

The initial 18 month period following the referendum decision consisted mainly of nerve-wracking suspense, interspersed with wistful fantasies about passporting rights being maintained. Now, however, the financial services industry has grudgingly accepted the need to expect the worst (whilst hoping for the best), and many firms’ Brexit plans are now chugging along, if not at full steam then at least with an air of inevitability about them.

With attention focussed on the more immediate practicalities of location strategy, the first three months of MiFID II have been something of a damp squib. There’s also a certain weariness amongst industry practitioners; having spent the past four or more years of our careers focussing on a single, all-encompassing motherlode of a regulation, go-live has been a somewhat deflating experience. However, for those who thrive on the fertile ground of uncertainty and change, there’s a lot more of that to come, with the impact of Brexit on MiFID II yet to be fully understood!

We know that the intention of the Great Repeal Bill is to transpose directly-applicable EU law into UK law, thus preserving legal certainty during the process of disentangling the UK’s affairs from the EU. This will include all current European financial markets’ Regulations. Directives, on the other hand, are already transposed into UK law. This is an important distinction. MiFID II, as a Directive, already exists in UK law. It’s mainly built into the FCA Handbook, with authorisation, governance and management, investor protection and other provisions embedded in the relevant sourcebooks.

Aside from the passporting arrangements, most of these, such as best execution, costs and charges, order record keeping, and senior management responsibilities and arrangements, are fairly standalone and likely to continue unaffected following a Brexit in any form. Furthermore, the FCA has historically played a very active role in developing these business conduct standards, and in some cases has even gold-plated the EU’s proposals. While there is scope for the FCA to diverge slightly from the EU in terms of detailed disclosure requirements, it’s relatively safe to assume that there will be little or no change to these principles.

MiFIR, on the other hand, represents the part of MiFID II that will have to become, in future, part of UK law. As a Regulation, it is currently directly applicable to all EU Member States. And this is where, for anyone with even a passing acquaintance with MiFID II’s impact on trade execution and transparency, things start to get really interesting.

Let’s start with the Systematic Internaliser (SI) regime, aimed at bringing bilateral OTC trade execution into a more lit environment, by imposing similar requirements around price transparency and execution as those to which multilateral trading venues are subject. An investment firm or credit institution is deemed to be an SI in an instrument or set of instruments if it exceeds certain thresholds in terms of its OTC trading with clients, as measured against total European activity. What happens, in practice, when the UK is no longer part of the EU?

The instrument scope of the SI regime is dependent on the “Traded On a Trading Venue” (TOTV) designation, which is determined by whether or not an instrument is available to trade on a MiFID trading venue (RM, MTF or OTF). Given the UK is currently (and will quite likely continue to be) home to a substantial proportion of total European trading activity, its departure will remove a significant chunk from the denominator of the SI calculation.

There is some uncertainty around how the TOTV scope will be impacted, as this is dependent on the Brexit plans of existing MiFID trading venues (many of which are currently UK-authorised and will likely need to migrate at least part of their activity to an EU27 location). Assuming the SI regime will remain largely intact in the UK, and all other things being equal, this means that many more firms could find themselves subject to either the EU or UK SI regimes (depending on where they are based).

If a firm is an SI, it has an obligation to make pre-trade quotes public via an Approved Publication Arrangement, or APA – like a market data vendor. APAs are currently authorised to operate across the EU. Post-Brexit, there will be a split between EU and UK APAs. What will this mean for the quality of pre-trade data (which is admittedly not great at the moment)?

Moving on to multilateral trading, what is the likely future for the Derivatives Trading Obligation (DTO)? The DTO scope is (typically, but not necessarily) a subset of the instruments subject to the EMIR Clearing Obligation. Trades in instruments subject to the DTO, and for which both parties are subject to the Clearing Obligation, may only be executed on a MiFID trading venue.

The determination of this subset of instruments is based on a number of factors, including liquidity, availability on more than one trading venue, accessibility to participants, etc. A split in liquidity across EU and UK instances of a trading venue will impact all of these factors. Furthermore, the ability of firms to continue trading with counterparts in other jurisdictions that are subject to their own trading obligations (such as the Trading Obligation for SEFs in the US, and a number of APAC variants) is predicated on an equivalence determination being made between both jurisdictions.

The UK must independently agree venue equivalence with not only those countries but the EU as well, in order to prevent both catastrophic liquidity fragmentation, and possibly irreparable damage to London as a trading hub in terms of the location strategies chosen by firms.

These are but a small taste of the wider challenges that the Great Repeal Bill will pose to both the UK and EU financial services industries, post-Brexit. It’s also worth bearing in mind that MiFID II is the primary source of EU rules around third country market access, both to and from the EU. Due to the highly politicised climate, many of these rules have yet to be fully defined by ESMA, pending the outcome of UK-EU negotiations – especially given the UK will be the third country most significantly impacted by them.

©BestExecution 2018

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Equities trading : Profile : Alasdair Haynes

Ian Rycott

April 19, 2018

Be40_WEB_Alasdair-Haynes-532x750 — Alasdair Haynes, Aquis

HOW TO CHANGE MARKETS, PERMANENTLY.

Having led from the front in many innovative market developments, Alasdair Haynes, CEO of Aquis Exchange reveals the keys to delivering change in capital markets.

You have helped to drive three new concepts to fruition in European capital markets: the crossing network / dark pool with ITG POSIT; the maker-taker model MTF with Chi-X Europe; and the subscription model of platform via Aquis. What effect does innovation have on trading?

Consider the way that technology has been used to try and make sport fairer, whether via the Hawk-Eye in tennis and rugby, or the instant replay footage for the referee. There is always resistance when the idea is first proposed. There are always players who think that they might like to have influence over the umpire, and they will resist change. However the end result for both the spectator and the player has been better sport.

In capital markets, whether you are an end investor or a ‘player’ in the sense of market participant, you want to have the capability to execute your decisions as cleanly as possible. That means as free from interference as possible so you can get the result you want.

Has the philosophical outlook for buy and sellside firms changed over the last ten years?

The buyside are more empowered now, but where they use that power is still questionable. The senior management regime means that heads of trading desk have that authority and there is just a question of how they use that authority. But there is no doubt in my mind that they must grab that power and use it.

Going further down the chain, the trustees of pension funds have to question what is going on here. Pension holders need to have a market structure that is better and more open. The trouble with our game has always been the series of vested interests and their influence will not go away unless we get transparency. Regulators are right to call for it, but the market absolutely hates change.

Has the dealer side changed philosophically in that time?

Not as much as we would like. There hasn’t been an epiphany moment but we are closer to it now than in the last ten years. People are able to make informed decisions more ably today than in the past. Regulators often consult the people who have an interest in preventing change about the change itself, and so that process must be open for the public to inspect.

The market is not a simple thing for the end investor to understand. If you can make it more straightforward then we will have better outcomes. In the same way that rugby – with its very complex set of rules – is better understood now because referees have microphones and their judgement is broadcast to the spectators. The equivalent is needed in our business and it is coming.

What lessons have you learned from your drive to innovate?

I have learned a lesson from trying to force change, and that is people do not like the fear of change. I have learnt that, no matter what industry you are in, you have to persuade people that the place you are going to is significantly better than the status quo.

Unless they can see the benefit themselves they will not start to change, which is why it is so hard to effect. People have to be walked down a very clear path of why they and their customer will benefit.

If you look at the effect that subscription pricing has achieved – it is quite outstanding. It would cost you US$30 million to get music provided by the likes of Spotify and you can access it for US$10 a month. Look at Amazon Prime on shopping, Netflix on movies, Sky for television; it hasn’t hit the finance industry yet but it has revolutionised access for all of those other industries.

What we are trying to do here is drive efficiency and cost benefits for the end investor. It took ten years for Netflix to break Blockbuster, and more than ten years for Amazon to break into retail. So at Aquis we know this will take a long time because we are effecting change upon an industry. I am confident because other industries have made this change and seen the benefit for the customer, so it will happen in financial services.

What is needed to overcome the barriers of incumbent, vested interests?

Time, pressure, influence and ultimately patience. To succeed you have to have influence at all levels. To show that something will be better than the status quo you must persuade other people to say that it will. Then you start to see change. That is the pressure and influence. Time is needed because you cannot make things happen overnight – people who think otherwise are disappointed.

You have to be willing to sit there, with the money, to support something as it goes through to the tipping point. Once you reach there things happen very quickly. People recall the Berlin Wall falling, but everything that led to it happened so slowly that it wasn’t even perceived by most of the world until the fall.

What hasn’t changed in the last ten years?

You have to be around for some time before people will trust you. The City relies heavily on trust. You have to earn that.

Have regulators come a long way over that period?

Yes. They come in for a huge amount of criticism and have a hard job. They have to listen to a wide range of opinions to try and move people in the right direction. After policy decisions are made regulators need to find a way to make that work through the application of rules, while at the same time a lot of the very clever lawyers that work in the City look at how they might get around those rules.

Will the political fragmentation that we now see under Brexit and protectionist policies have an impact upon the regulation of the City?

Yes. One dimension is the national competent authority imposing rules, the second dimension is their interpretation of pan-European rules into a national framework and the third dimension is now managing the politics of Brexit. Regulators can enforce policy and rules if they are clear. However, if you have politicians negotiating on those rules when there is no clarity, it becomes incredibly difficult to operate in. I believe the Financial Conduct Authority has to make decisions now, based upon things that might change during the Brexit negotiations.

What a company needs is certainty; whether the rules are good or bad for a company it is better for the industry that everyone knows them. I think at the moment we as an industry do not have that certainty and in that context it could be a very painful year for the City.

Alasdair Haynes is the founder and CEO of Aquis Exchange, the pan-European equities trading platform, which has introduced subscription pricing and innovative order types into the marketplace. In addition to operating an FCA-regulated MTF, Aquis Exchange develops technology for third parties.

Alasdair is the former CEO of Chi-X Europe and was responsible for growing the business into Europe’s largest equities exchange and into profitability before its sale in late 2011. Prior to that, he spent 11 years heading up ITG’s international business, pioneering the introduction of electronic trading and crossing into the European and Asian marketplaces. Alasdair began his 30 plus-year career in the City with Morgan Grenfell and has held senior positions at a number of investment banks including HSBC and UBS.

©BestExecution 2018

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Regulation & compliance : MiFID reverb : Gill Wadsworth

Ian Rycott

April 19, 2018

THE MANY MOVING PARTS OF MIFID II.

Gill Wadsworth assesses the post MiFID II landscape to date and the gaps still needed to be filled.

The arrival of MiFID II has been likened to receiving an incomplete 1000-piece jigsaw. Parts of the set arrived at different times and from different sources, yet the financial services industry is still expected to piece it together.

This analogy, from Nels Ylitalo, director of product strategy and regulatory solutions at FactSet, is in part prompted by the European Supervisory and Markets Authority’s (ESMA) decision to delay parts of the directive just before the regulation was due to come into force.

In December ESMA relaxed requirements for markets participants to have a legal entity identifier (LEI), which acts as a kind of badge of legitimacy. Initially the regulations had seemed incontrovertible: no LEI no trade. But in December – days before D-day, ESMA introduced a six-month grace period.

This was a significant relief for those companies struggling to meet the LEI requirement. Many players especially smaller ones without the formal paperwork were struggling to play.

However, the organisations that were fully expecting the ‘no LEI, no trade stipulation’ to be in force from January 3, have systems that automatically refuse to work with unlicensed businesses. This creates something of a perverse situation where firms who are compliant with MiFID II may be worse off than those who are not.

Ylitalo said: “The surprise announcement of a phase-in period for LEI requirements carried other consequences in its wake both for national authorities and firms whose systems had been built to accommodate the strict ‘no LEI, no trade’ rule.”

This is not the ideal start to a piece of legislation that has been plagued by delays, rewrites and has been seven years in the making.

Ultimately its aims are laudable. Improving transparency, efficiency and ultimately confidence in the financial system are critical for the industry if it is to avoid repeating mistakes of the past. Importantly, too, it empowers investors to better compare costs, and to understand what is happening to their money at all stages of a trade.

But there is just so much data that financial services companies must track, formalise, standardise and report that in some cases they are struggling to keep up.

Mack Gill, chief operating officer at Torstone Technology, a global provider of cross-asset securities and derivatives post-trade processing technology, said: “It is like when you see a duck floating along the water, it looks serene but you don’t see the legs paddling frantically underneath the surface. It has been a lot like that for some firms post [MiFID II January] deadline.”

The data hurdle

The enormous data reporting requirements are at the heart of challenges for many firms. MiFID II, under RTS 27, requires firms to demonstrate that they have taken all sufficient steps to ensure best execution. They must, at no cost, publish information for the public revealing details about price, costs, speed, and likelihood of execution for individual financial instruments.

The information should be ‘available for download by anyone who might be interested’.

For some organisations the sheer number of products they hold and the transactions they undertake make meeting these reporting requirements quite an undertaking.

Dermot Harriss, senior vice-president, global head of regulatory solutions at data management provider OneMarketData, says: “In the area of best execution reporting, RTS 27 especially, firms have struggled with all the data marshalling, field mappings, and the symbology mapping. The best execution rules have created a much broader data management challenge than previous regulations or other aspects of MiFID II.”

It is possible for firms to use Approved Publication Arrangements (APAs) or assisted reporting which take the heat out of having to produce reports themselves by passing responsibility to a third-party. But even this is not without challenges.

Carl Nilsen, director of sales at Simplitium, which is helping firms meet their MiFID II transparency requirements, said firms are struggling to provide clear data. “The industry is faced with challenges relating to the quality of reference data,” he adds. “Whilst the regulator and several industry initiatives are working on solutions for this, it is adding to the already complex process of correctly determining when and who has the reporting obligation in a given scenario.”

He notes that this situation makes it ‘more difficult for firms to meet their obligations in line with the deadlines set by the regulator and impacts the completeness and quality of transparency reports’.

While the struggles for financial services firms are clear, there is no running from MiFID II. Thus far the regulators have not penalised business for compliance failures and, as long as firms show they are trying to get in line, the supervisors have been pragmatic. However, such pragmatism cannot last forever.

“We don’t know how things will look six months from now but it will likely settle down in the second half of the year,” says Gill. “As regards enforcing compliance, look at MiFID I and MiFIR – material fines were put in place by regulators for non-compliance, affecting big industry participants. We could see this happen in the second half of the year as MiFID II beds down.”

Across the pond

Compliance issues have been felt globally, but US businesses were expected to have it harder than their European counterparts since their domestic regulations do not follow the EU’s approach. Commentators though observe that US firms have responded well to European rules.

Mehdi Sunderji, managing member at Nucleus195, a research provider for asset managers says, “It had been all too easy for US firms to dismiss the new [MiFID II] regime as irrelevant outside of the EU borders. However, in the last few months we have seen unbundling recognised as global best practice and adopted by many US managers.”

Daniel Carpenter, head of regulation at MeritSoft which provides back office systems, agrees US firms are responding well to unbundling demands. “US managers’ projects have been operating at full tilt for some time and they quickly recognised the need to address MiFID II strategically whilst still retaining the ability to manage the US market requirements all on a single platform,” he adds.

Jack Pollina, head of global commission management at electronic equities broker ITG argues that the US regulatory regime has not seen asset managers favour a bundled approach to research costs. He said US companies have embraced commission sharing agreements (CSA), which can be developed to work under MiFID II’s unbundling requirements.

“I respectfully disagree with the notion that US regulation favours bundled research. While bundled trading is widely used, 85% of asset managers in the US use CSA to pay a portion or much of the research cost,” he adds. However, Pollina concedes that since MiFID II, he has ‘definitely seen a growth in full unbundling across the US’.

Financial services companies are coming to terms with MiFID II and in many cases real progress has been made, but the regulation remains challenging to implement. The impositions on companies are huge and will take a long time to get right. Meanwhile the macro political environment does nothing to ease the situation. Even before Brexit, MiFID II was trying to unite a fragmented system; as the UK prepares to leave the EU, there may be yet more challenges ahead.

However, the regulation is unlikely to be derailed and that 1000-piece legislative jigsaw should be completed eventually to give the EU a truly transparent financial system.

©BestExecution 2018

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Viewpoint : New technology : Mathieu Ghanem

Ian Rycott

April 19, 2018

NEW MARKETS ARE READY TO ADOPT NEW TECHNOLOGY.

Mathieu Ghanem, Managing Director, Global Head of Sales at ADS Securities.

Over the last 50 years we have seen a general opening up and liberalisation of markets which has stimulated global trade. As President Donald Trump continues to move the United States to a domestic-focused agenda we are faced with the possible introduction of protectionism, which will impact global growth.

For many the approach being adopted by Mr Trump is not unexpected. The US trade deficit, the decline in the American manufacturing sector and the views of the people who voted for the President are all linked into this new policy. The issue for many observers is that while China is undergoing a period of change, re-engineering its economy based on new industries and new markets, the US seems to be taking the opposite approach, heading back to a business model of yesteryear.

At ADS Securities, we enjoy the solid and stable environment of Abu Dhabi, with the UAE offering a calm and secure base to do business from. However, we do have offices in London, Hong Kong and Singapore which could be exposed to the development of a trade war between the US and China. So what will be the outcome and how should trading firms react to these developments?

The historical political agenda included the creation of the European Common Market which facilitated global cross-border trade, looking to expand and integrate business. Today the political direction, almost as a reaction to the past, appears to be based on fear and isolation, driven by populism.

The potential trade war may be the current example, but we only have to look at Brexit in the UK, the separatist movement in Spain or the ongoing developments in central Europe to understand how these new political uncertainties are affecting markets. This in addition to the imposing of new politically motivated regulations and the rigid enforcement of existing regulation in a number of important financial centres.

The problem for the main financial markets in the US, Europe and Asia is that they are having to allocate a large proportion of their resources to deal with these issues rather than planning for the future. This puts these centres at risk, because it is the development of regulation and technology over the next few years which will dictate the financial structures and flows of the future. Change can be measured in days and they need to be able to cope with this rate of progress.

It is very important to understand that the actors of this change are not the traditional players. We are seeing the very first steps in the introduction of new technologies, the opening up of new markets and the creation of new systems which are being driven by the general public and not by governments. This is significant, and if banks, regulators and markets are managing political expectations, this financial renaissance has the potential to develop unchecked and uncontrolled. This type of financial/technological change will only benefit the most adaptable and reactive centres. The power will move to smaller countries or city states away from the main markets

One of these technologies is Blockchain, which will continue to be introduced and eventually will be an integral part of the global financial markets. It is technology which is linked to a new type of investment, a social democratisation of funding, which has no links with the old systems and approaches. Crowd funded, Initial Coin Offerings (ICOs) are providing the backing to develop the systems which may dictate all our futures. The ICOs, are being bought or backed by investors who have never owned a stock, bond or currency. The general public, not central banks, commercial banks or governments, may end up owning the technology that our future work depends on.

This creates opportunities for financial centres like Abu Dhabi to step up and provide the necessary guidance and framework to facilitate the new systems. Markets which offer a secure and stable environment and which are not directly caught-up with macro-political issues can provide the service that investors and traders are looking for. They can invest in technology, structure regulations which achieve the desired results and contribute to building a concrete future.

We have a strong belief that the move to trade wars and the threat of protectionism, the overt political regulation of some markets and the refusal to entertain the idea of change, will have a significant impact on how financial services work. New York, London, Singapore or Shanghai are not going to disappear but their influence will change as other smaller, specialist markets develop. These will be centres which have invested in technology and implemented the necessary regulation investors are looking for.

As major international powers continue to fight over the tariffs on soya beans, other smaller countries, will be preparing rules which allow early adopters to be the leaders on a super-fast highway.

Traditional liquidity which drives the financial world might remain in the largest financial centres as they are close to their markets. But when you understand that distributed ledger technology has the potential, through smart contracts, to safely and securely manage millions of transactions, currently carried out by large legacy systems operated by many thousands of people, the impact of the new technology is clear. There will be a significant cut in head-count and increased efficiency, with much greater flexibility as to where systems are located. In addition, if liquidity starts to move out of fiat currencies and into algorithmic based coins, then the role of the main global markets will face further drastic changes.

When faced with this type of threat the first reaction of most governments and regulators is to restrict, stop or ban, whereas they should guide, support and provide the legal framework to help these technologies develop. Only the regulators who look to understand and implement the benefits of the new technology will succeed.

I am afraid that as the super-powers move to protect their manufacturing and agricultural economies, secure in the knowledge they control the world’s financial systems, they may wake-up to find that instead of focusing on tariffs they should have invested their time in technology.

©BestExecution 2018

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Viewpoint : The cloud : Alex Wolcough

Ian Rycott

April 19, 2018

THE CLOUD HAS MORE THAN A SILVER LINING FOR THE FINANCE SECTOR.

In the finance sector, attitudes to cloud computing have evolved from sniffy ‘nimby’ism to outright advocacy. However, Appsbroker director Alex Wolcough argues that a simple ‘lift and shift’ approach to moving applications off-premise overlooks the many opportunities provided by the machine learning capabilities now native to leading cloud platforms.

Tipping point for the financial sector

Many industries have already realised the benefits of the cloud and have embraced the agility and cost benefits that on-demand compute and storage can bring. Previous concerns such as security, data protection and on-premise/cloud integration have been addressed to such an extent that retail, manufacturing, health and other industries are actively adopting the cloud – it now seems to be the finance sector’s turn to jump on board.

In the past, cloud technologies have met with strong resistance from the industry. For example, in-firm security and compliance departments – and even regulators – have thrown up objections to putting client or transactional data into external data stores. However, as with other industries, attitudes have softened as each of these concerns has been addressed. Government bodies and regulators have also started to provide helpful direction such as the FCA’s Finalised Guidance 16/5 (published in 2016) and the more recent EBA guidance concerning the use of cloud service providers by financial institutions, which was published in December of last year. Indeed, even GDPR provides clear guidance to EU firms on their ability to move data between countries, which gives lie to the myth that firms in a member state need to keep data within country.

Building cloud solutions

Many top-tier firms have already engaged dedicated teams to drive adoption of the cloud. However, the goals of these pioneers have not been to simply ‘lift and shift’ on-premise applications to the cloud. Why? Firstly, lift and shift does precisely that – it lifts and shifts all the complexity and cost currently residing in the data centre into the cloud. Secondly, they have sought to take advantage of the analytical tools and capabilities that often sit alongside cloud-based and on-demand compute and storage technologies.

This fresh approach has allowed investment firms and fintech providers to more efficiently build and deliver next-generation financial applications with both lower operational overheads and a lower overall cost base.

Turning MiFID II compliance into an advantage

A great example of how this powerful combination of capabilities has delivered real value has arisen from the implementation of MiFID II and MiFIR in the EU. With so much regulatory focus on the front office, many firms needed to build or buy capabilities that would capture client/sales desk interactions and ensure the correct implementation of MiFID II/MiFIR rules (e.g. Transparency, Record Keeping, Derivatives Trading Mandate, Transaction Reporting, Best Execution Reporting).

Building this capability on a cloud platform has allowed some banks not only to automate the application of the regulation but also to reap collateral benefits: applying the data analytics and visualisation tools available on the cloud platform to the data harvested for record keeping and regulatory reporting is now providing insights into client behaviour and profitability. For the first time, firms can get a detailed picture of client performance across both their electronic and voice businesses – much of this in near real-time.

Deeper analytics on demand

The depth of analytical capabilities offered by these platforms makes them attractive to quantitative analysts who seek deeper insights into both client and market behaviour. The elastic compute capability combined with huge storage capabilities means that petabytes of data can be analysed in relatively short periods of time with the additional benefit that banks only pay for what they use rather than investing in “tin” that can sit dormant. The familiar tools of the trade, such as “Python” or “R”, have been cloud enabled but it will be interesting to see how these will integrate with the machine learning capabilities now coming on stream on the major cloud platforms.

Risk analytics

It’s not just the front office that can benefit. The delay in the implementation of FRTB – the new rules on capital adequacy – and the softening attitude to cloud computing means that IT teams can now reconsider their approach to the infrastructure required to support the vast number of calculations needed for risk and capital adequacy modelling. By storing transaction events in the cloud and then applying modelling using the cloud’s elastic compute capabilities, firms can start to modernise and optimise their IT real-estate based on the immediate need at any moment in time rather than having to anticipate and plan for infrastructure months in advance.

Not ‘either/or’ but ‘and/and’

Of course, most financial sector firms will have a multitude of legacy applications they won’t want to re-architect. These platforms will sit alongside the new and will still require external inputs, such as market data and instrument reference data, as well as access to private client data. Many market data vendors are catering to this need through the provision of direct data feeds into the cloud, ensuring the same access to data that on-premise applications get today and providing the vital “air” that financial applications need.

Conclusion

It often takes several iterations of an innovation before it reaches its full potential. The evolution of the Arpanet – an obscure business recovery network for American research universities – into the Internet around which much of our lives now revolve is a great example of this. We are just beginning to see how a new wave of cloud technologies can empower technologists to deliver to the ever increasing demands of lines of business. However, the early adopters in the finance sector are already enjoying the benefits that the cloud brings in the form of both savings on the bottom line and contribution to the top line.

©BestExecution 2018

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Viewpoint : MiFID reverb : Tim Healy

Ian Rycott

April 19, 2018

HOW BEST TO MEASURE MIFID’S SUCCESS?

By Tim Healy, Global Marketing and Communications Director, FIX Trading Community.

Never let it be said that the FIX Trading Community fails to debate the full gamut of issues. The 2018 EMEA Trading Conference, in London, was the organisation’s tenth annual event and threw up plenty for discussion, ranging from periodic auctions and broker preferencing, to the appropriateness of gentlemen wearing coloured socks in the City of London.

The more serious discussion was over the implementation of the second iteration of the Markets in Financial Instruments Directive (MiFID II). Were market participants now satisfied that implementation had been a success?

The answer was never going to be straightforward. A straw poll by FIX, conducted among 177 of the delegates found that 55 percent believed implementation had been “by and large” successful (Fig. 1). This was a view shared by regulatory representatives at the conference.

However, a not insignificant 33 percent stated they were still uncovering new challenges on a daily basis. A further 12 percent admitted they had only been able to implement the bare minimum required under the rules, due to resource constraints.

The implementation of MiFID II has not, at least so far, resulted in a fundamental change to trade flows, according to policymakers. The anticipated wave of feedback from the buyside, on controversial themes such as the introduction of double volume caps, has failed to materialise, delegates heard.

Much of the criticism of the rules, from conference delegates, was linked to whether MiFID had achieved its intended outcomes. With the regulations designed to create more activity in lit markets, delegates from trading venues and fund firms alike asked how the implementation of MiFID can be deemed a success if trading behaviour hasn’t materially changed.

When asked whether they supported the regulatory objective to increase the amount of trading that was conducted on lit markets, delegates actually said no. Of the 97 delegates that voted, 60 percent said that they did not support the objective (Fig. 2).

That said, MiFID has provided the industry with some positive outcomes, according to some. Speakers noted that the new rules have encouraged the development of innovative software, enhanced compliance and improved workflow and the quality of analytics – all good news for the end investor.

However, broad agreement remained that challenges will linger long after the MiFID II implementation date of 3 January 2018. A poll of 172 delegates, found that 69 percent believe that the collection, analysis and delivery of accurate data to meet MiFID requirements remains the biggest challenge that firms still face, following the implementation date (Fig. 3).

Behaviour and fragmentation

Panellists representing trading venues noted that greater fragmentation had been a consequence of MiFID II. Broker crossing networks had gone, being replaced, to some degree, by Systematic Internalisers (SIs). Periodic auctions, meanwhile, have emerged and more business is being done in blocks.

With such radical change being witnessed in a very short space of time, delegates called on policymakers and regulators to pause before making further changes which could disrupt the sector further. For some, fragmentation has made the marketplace even more difficult to navigate.

While there was consensus that the industry must not become complacent about the speed of change in the broader financial sector, there was a need to take stock of the impact of the latest regulatory changes by looking at the data and see how markets evolve in the coming months.

Nervousness around the speed of market evolution, is perhaps understandable. Panellists had suggested that fund firms had been consolidating the number of brokers that they used in the lead up to MiFID but noted that those brokers who remained “on panel” were benefiting from greater investment.

A poll of the audience, however, did not support this view. Of 85 delegates polled, 61 percent said they were not seeing evidence that sellside relationships with the buyside had reduced post MiFID (Fig. 4).

Evolution of the buyside

Asset managers are continuing to see growing cost pressures on their margins. The result has been a focus on costs and implementation of new processes to ensure that capture of beta and smart beta can be done as cheaply as possible. The growing importance of quant analysis, the electronification of credit and FX and development of machine learning, were all noted as examples.

These cost pressures have trickled down, leading some fund groups to build their own algorithms, while others have been using established ones in new ways. With organisations investing more in data, panellists stressed the growing importance of the FIX protocol.

Delegates were asked if their firms were investing in increasing cross-asset trading and investment capabilities. A poll of 80 delegates found that 75 percent said they were increasing cross-asset trading capabilities, while only 25 percent were not (Fig. 5).

A secondary poll of 77 delegates were asked whether they were creating or investing in new data products that can be consumed by the buyside investment process. A massive 78 percent said that they were and just 22 percent said that they were not (Fig. 6).

In a look at how the fixed income market has evolved, buysiders noted that new execution policies, introduced ahead of MiFID II, meant that greater justification than ever before was required as to where flows were being directed. Delegates heard how the Financial Conduct Authority had issued a letter to chief executive officers on Payment for Order Flow in December of 2017 to underscore its tough new regime. Conference delegates said they were now increasingly recording the steps they take to source liquidity.

Some things hadn’t changed quite so much, however. One theme in particular was the influence that portfolio managers still have in fixed income trading. A poll of 18 delegates showed that just 6 percent of buy side firms now operate a fully segregated dealing desk with no fund manager input. The majority (67 percent) said that portfolio managers are welcome to contribute information such as axes, but the execution still sits with the dealing desk. A further 28 percent said that outright guidance is still given as to where trades should be made (Fig. 7).

Future innovation

With banks increasingly referring to themselves as technology businesses and tech companies such as Google and Amazon widely tipped to be the investment houses of the future, delegates concluded the day by assessing current spending on artificial intelligence, machine learning and distributed ledger technology.

The audience for this panel was broadly split between the sellside (27 percent), vendors (26 percent), trading venues (25 percent) and the buyside (14 percent). Regulators and others accounted for the remainder.

One of the most interesting results came from the poll of current investment in AI and machine learning. The poll of 75 delegates found that 36 percent were currently researching AI/ML technology for a “business use case” while a further 32 percent had an active delivery project.

Speakers noted that the industry was currently in a “technology arms race” driven by market participants’ hunger to drive down costs. They also warned that cyber security was increasing in importance as attackers were becoming far more sophisticated than ever before.

It was, perhaps, fitting then that the event concluded with a reminder that the FIX community needs to engage more than ever before, given the speed of change in the market. But with so much happening, there seems to be a consensus that there is much to be optimistic about in the year ahead.

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Viewpoint : MiFID & MAR : Shiran Weitzman

Ian Rycott

April 19, 2018

MANAGING eCOMMS COMPLIANCE.

From tactical to strategic, from compliance to efficiency, from data capture to best execution. By Shiran Weitzman, Shield Financial Compliance.

Under MiFID II rules all communications that support the processing of order management and investment decision-making must be captured for the express purpose of understanding how and why decisions were made, regardless of whether those communications actually resulted in a trade.

This means that compliance officers have to sift through a haystack of digital information for the needles that indicate patterns of market abuse or misbehaviour. However, identifying those patterns is no small task. There are three operational hurdles that have to be overcome.

The first hurdle is to bring all associated communications into scope, across both approved and non-approved channels. As technology is constantly evolving, firms must acknowledge that traders, investment managers and advisors can use multiple routes to interact with other parties. These channels may not have been defined in the rules previously, but are certainly in scope for the new requirements.

If there is any gap in data capture, the firm may find it has missed activity which has been deliberately designed to bypass the compliance checks, leaving the business open to punitive action.

The second challenge is to recognise that each communication channel may provide data in a different format, all of which will need to be aggregated, standardised and correlated in order to be assessed effectively. Voice, text, email and a variety of messaging models must be brought together, whether they are internally or externally managed. Despite the technical challenges posed, the firm will still be liable for abuse if data has been misinterpreted.

The third challenge is to identify patterns of abuse and discern them from non-abusive activity. Just as communications channels are multiplying, changing market structures can create fresh potential for gaming and other malicious activity. That can make the role of the compliance team especially hard.

MiFID II formalises rules for an enormously complex set of market structures in a legal framework. Compliance requires a data management platform that can both gather and interpret communications that sit behind these markets and store, manage, and analyse all relevant data, to enable the ‘needles’ to be easily picked out and the trading activities under question to be reconstructed.

From a technology perspective, firms will benefit from a centralised system that can interface in a flexible way with a broad range of technologies and take a holistic approach to data management, where all types of data can be structured, categorised and/or correlated in a way that makes it accessible and meaningful to a variety of management, compliance and IT functions.

This must now be an essential part of a firm’s strategy. The temptation to use siloed, tactical, point solutions to solve smaller problems as they occur, will create gaps both in interpreting data and understanding patterns of behaviour, increasing the risks of non-compliance.

However, by taking a more strategic approach and deploying the right kind of enterprise-grade technology, a firm will not only support its compliance requirements, but also enable ongoing business and efficiency benefits, such as drawing on eComms data to better facilitate areas such as best execution, for example.

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Viewpoint : MiFID reverb : New priorities : Peter Moss

Ian Rycott

April 19, 2018

NO TIME TO REST.

MiFID II: We’ve seen an orderly transition so far, but there’s still plenty of work to be done by firms, says Peter Moss, CEO, SmartStream Reference Data Utility.

January 3rd came and went. No major disasters, no systemic failures. Trade volumes were light in the first week, so perhaps we shouldn’t be surprised that the introduction of MiFID II/MiFIR proved more of a whimper than a bang. But that would be to ignore the huge amount of effort financial services organisations put into making sure that the advent of MiFID II passed off smoothly. Project teams across financial institutions laboured for many months, and even over the festive break, to make systems and processes ready for the MiFID II start date.

Although it is still early days, and so any assessment must be cautious, the financial industry appears to have made it through the introduction of MiFID II in reasonably good shape. The lead up to MiFID II was, however, anything but a walk in the park for the sector.

The industry faced delays in receiving information from regulators and so, at times, had to grapple with a lack of clarity as to how it should be preparing itself for MiFID II. ESMA’s Financial Instrument Reference Database arrived in October, rather than the anticipated July to August. Clarification for RTS 1 and 2 only came in early December. Market participants had to cope with last minute changes; announcements from ESMA were still being made on the Friday before Christmas. And gaps still remain – the enforcement of the requirement for LEIs for every client has been postponed for six monthsand ESMA is only just starting to publish certain information, for example, the list of instruments subject to the double volume cap.

So where should organisations now be turning their attention? Prudent firms will avoid the temptation to rest on their laurels and instead consider which parts of their infrastructure are functioning efficiently and which are in need of remediation. MiFID II is highly demanding, requiring large amounts of data. Is data missing, inaccurate or has it been incorrectly interpreted? Is extra automation necessary? Are there new processes to be tested? Financial authorities will be fine-tuning regulation during coming months – market participants will need to be vigilant, keeping an eye out for regulatory announcements and responding, where necessary, with adjustments to their infrastructure.

In the scramble to meet the January 3rd deadline, firms may have taken shortcuts, adopting tactical fixes or sourcing data inefficiently. Organisations should now be reviewing the frameworks they have put in place – are they resilient, cost-effective and sustainable? Do they provide sufficient control? Can they be relied on in other jurisdictions? MiFiD II looks set to have a profound, long-term effect – optimising existing systems and processes is vital if these are to stand firms in good stead not just now but for the foreseeable future.

Transaction reporting

One further but essential requirement – and an area to which relatively little time has been devoted by firms – is a control framework to ensure precise, transparent transaction reporting. Under MiFID I transaction reporting was primarily an issue for the sellside. Under MiFID II, however, all investment firms, including those on the buyside, are responsible for ensuring transaction reporting is correct – Regulatory Technical Standard 22, Article 15 makes plain the need for “investment firms” to have in place arrangements “to ensure that transaction reports are complete and accurate.”

The buyside can no longer simply rely on a broker or trading venue to undertake transaction reporting but must have adequate oversight of this activity. The current bedding in phase of MiFID II provides an excellent opportunity for firms to take a good look at their control framework and ask some important questions. Can we independently verify that our reporting is correct? Do we need an independent data source? Are our reconciliations processes accurate enough to ensure that what we actually did is what we reported?

A further challenge on the horizon is the systematic internaliser (SI) regime, which will come fully into force in September 2018. From January 3rd 2018, firms have had the choice to opt in as SIs but as of September 2018, regulators will determine whether a company falls within this category, based on trade volumes. As rules are gradually clarified, sellside firms will need to keep a close eye on regulatory announcements to check if, when, and how they will be affected.

The incoming SI regime will have an impact not only on the sellside but on the buyside too. Under MiFID II, for post-trade reporting purposes, market participants must identify if counterparties are systematic internalisers for the financial instruments they are trading in – so the buyside will need to know whether it is dealing with an SI or not. Clarifying this matter is not a straightforward business, as regulatory protocols have failed to set out a mechanism which allows the easy identification of systematic internalisers for particular instruments.

One answer to this dilemma is a centralised database which lists systematic internalisers for each specific instrument. As financial authorities have not provided such a solution, the task of devising a suitable mechanism has instead fallen to the industry. The need to solve this problem has become particularly pressing, given the looming September 2018 deadline for the transition of the SI regime from a voluntary to compulsory basis.

An industry collaboration – between a number of Approved Publication Arrangements (APAs) and the SmartStream Reference Data Utility (RDU) – has been set up to plug this gap in the regulatory framework. The APAs collect the list of instruments for which their SI customers are providing SI services, and the RDU consolidates that data into a master file that can be shared with the APAs, the contributing SIs and other market participants. This centralised registry enables market participants to readily identify systematic internalisers for a particular financial instrument. The data the registry provides will bring greater clarity to the market but, more specifically, it should also enable the buyside to benefit from reduced compliance costs as firms will be able to select brokers that offer the required systematic internaliser services.

In conclusion, the MiFID II regime is bedding down. Financial authorities are giving the market some time to settle, as well as finessing certain aspects of the new regulation. This transitional phase will not last for long and, all too soon, regulators will begin to look in earnest at how closely firms are complying with the provisions of MiFID II. The next few months offer a breathing space and present an ideal opportunity for firms to review the infrastructure they have in place and to ensure that it is truly fit for purpose.

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News : Citi continues to bolster equities franchise

Ian Rycott

April 19, 2018

Citi continues to bolster equities franchise.

Citi has hired Michela Ferrulli as the new head of equities sales and sales trading for Central & Eastern Europe, Middle East and Africa (CEEMA) from Bank of America Merrill Lynch (BAML).

The 20-year veteran who will also act as a managing director of the bank, had been with BAML for more than six years as head of Eastern Europe, Middle East, and Africa (EEMEA) equity sales. She has previous experience at Citi, having spent 11 years at the firm between 2001 and 2012, working on both the Europe, Middle East, and Asia and Latin America regions.

“We are confident Michela will be a great partner and asset to our business,” Mark Robinson, head of cash equities for the EMEA region said in an email to staff. “Her appointment highlights our continued focus on building the momentum of our equities franchise.”

The latest appointment highlights the US investment bank’s continued focus on bolstering its equities franchise. The company has made various senior hires from its competitors since last year in a bid to strengthen the business. They include Christophe Pochart, who joined from BNP Paribas to co-head North American equity derivatives sales and the multi-asset group for the Americas, and Lorenzo Leccesi from JP Morgan to head up UK and Ireland equity derivative and cross-asset solution sales.

Citi also expanded its equities execution team last summer, with the addition of Joseph Sidibe from BAML who joined the bank in a newly-created role as a senior salesman within the equities electronic execution business.

Cash equities declined 3% to $9.2bn across Wall Street last year, but according to industry analysts Citi’s cash equities business, while smaller than competitors at the top of the league tables, actually grew by more than 7% in 2017.

First-quarter trading revenue is on pace to post a percentage increase of “low to mid-single digits” from a year earlier, chief financial officer John Gerspach said at a recent investor conference. The equities business has a chance to hit $1bn in revenue this quarter, he said, which would be the first time eclipsing that mark since 2015.

The bank’s equities and foreign-exchange businesses have seen the biggest boost as markets have experienced sharper swings, Gerspach said. While investors stepped away during some of the most volatile periods, they’ve largely been more active this quarter, he said.

Volatility is back in markets, as US stocks had their worst single-day plunge in almost seven years last month and 10-year Treasury yields reached the highest level in more than four years.

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News : Fixed income : Buyside plan to upgrade tech

Ian Rycott

April 19, 2018

Liquidnet study underscores the role of advanced technology.

Corporate bond asset managers are looking to switch or upgrade their order management system (OMS) and execution management system (EMS), according to a new study from Liquidnet, Future Tech – Trading Bonds Post MiFID II, which explores how MiFID II impacts the role of technology in trading corporate bonds

Over three-quarters of buyside respondents interviewed across Liquidnet’s member network said they plan to upgrade their technology services in 2018. Half of those expect to implement an EMS, while 43% plan to upgrade their OMS and 10% will switch OMS providers.

Of those looking to install an EMS, 94% are choosing to do so to manage liquidity. However, the size of the firm plays a factor given the cost of implementation. Fifty seven percent of small firms are not investing in an EMS at this stage compared to 64% of their larger counterparts who are.
Compliance with regulatory initiatives such as MiFID II is driving the adoption of technology across European bond dealing desks, particularly with the focus to meet best execution requirements.

“Historically, some European fixed income portfolio managers were seen as slow to appreciate the role bond dealing desks can play in implementing investment strategies and generating alpha,” said Rebecca Healey, head of EMEA market structure for Liquidnet and author of the report.

She added, “Firms are now beginning to recognise the central role technology plays in making workflows more efficient, allowing trading desks to better evaluate the true cost of execution and not solely focusing on the lowest price possible as that is not necessarily ‘best execution’.”

Around 76% of respondents are focusing on the need for standardised connectivity throughout their workflows, as legacy technology makes the fluid flow of accurate data challenging.

Looking ahead, Liquidnet foresees an extension of the role dealing desks play in implementing investment strategies from merely executing a PM’s instructions to a true execution partnership, while still ensuring separate trading functions to avoid any perceived conflict between execution and advice. To achieve this, technology tools will be required in order to give greater control to the buyside trader over the execution process.

“Basically, what the survey points to is that the main requirement for the corporate bond trading desk of the future is the ability to combine order management, data aggregation, and access to electronic liquidity with the overarching goal of empowering the trading desk to deliver more alpha,” said Constantinos Antoniades Liquidnet’s Global Head of Fixed Income.

Firms are not only addressing technology issues but also behavioural shifts across organisations. Dealing desks now need to source liquidity from multiple locations as well as understand the optimal point of entry or exit of a trade – even utilising an alternative risk/reward bridge investment while waiting for improved liquidity sources to emerge.

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REVERSING DIRECTION.

MiFID II may be grabbing all the limelight but Jannah Patchay, Markets Evolution argues now is the time to look at the Great Repeal Bill.

HOW TO CHANGE MARKETS, PERMANENTLY.

Having led from the front in many innovative market developments, Alasdair Haynes, CEO of Aquis Exchange reveals the keys to delivering change in capital markets.

THE MANY MOVING PARTS OF MIFID II.

Gill Wadsworth assesses the post MiFID II landscape to date and the gaps still needed to be filled.

NEW MARKETS ARE READY TO ADOPT NEW TECHNOLOGY.

Mathieu Ghanem, Managing Director, Global Head of Sales at ADS Securities.

THE CLOUD HAS MORE THAN A SILVER LINING FOR THE FINANCE SECTOR.

HOW BEST TO MEASURE MIFID’S SUCCESS?

By Tim Healy, Global Marketing and Communications Director, FIX Trading Community.

MANAGING eCOMMS COMPLIANCE.

From tactical to strategic, from compliance to efficiency, from data capture to best execution. By Shiran Weitzman, Shield Financial Compliance.

NO TIME TO REST.

MiFID II: We’ve seen an orderly transition so far, but there’s still plenty of work to be done by firms, says Peter Moss, CEO, SmartStream Reference Data Utility.

Citi continues to bolster equities franchise.

Liquidnet study underscores the role of advanced technology.

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