The implementation of wholesale changes to Europe’s trading rulebook are largely “ceremonial” and it is still “early days,” particularly in non-EU nations, according to some market specialists, as firms continue to struggle with implementation.
The revised Markets in Financial Instruments Directive and Regulation, known collectively as Mifid II, has gone live in Europe as of January 3, 2018, prompting significant changes to trading practices across the 28-member bloc.
However, despite a one-year delay to Mifid II that was initially prompted by concerns that technology could not be developed in time to comply with the original deadline, some firms are still unaware that they even have a compliance obligation, specialists say.
“We’re still in the early days of Mifid II compliance as there are many firms that don’t even realize they fall under the Mifid II rubric,” says Ben Cukier, a partner at growth equity firm Centana Growth Partners.
Most agree that among European firms, there is a general level of understanding about obligations pursuant to Mifid II. However, the comprehension and preparation on a non-EU basis is, according to the Asia-Pacific COO of a UK bank, problematic.
“As we start to go down the smaller entities in some of these more esoteric jurisdictions, the amount of resources that our counterparties have put into building, crafting and ensuring that they are compliant and able to trade, is significantly lacking,” says the source.
Much of this disconnect centers on data issues, such as privacy and disclosure. Where it becomes concerning, the bank COO says, is that this problem exists even in stable and sophisticated markets in Asia-Pacific.
“We’re sitting in Singapore and that’s considered one of the more developed financial markets and we’re approaching this level of an understanding gap,” the COO says. “Now go and have a conversation in Vietnam, Indonesia, elements of Malaysia on client disclosure.”
As such, while enormous levels of work have gone into Mifid II preparations at major financial institutions, for many firms, January 3 has been “not as significant” says the chief information officer of a global asset management firm.
“January 3 has been a very real deadline for many of the larger firms, but for the smaller ones, who knew they weren’t going to hit it, it’s been largely ceremonial,” the CIO says. “A lot of people will be working on putting things in place to suit the system as it works in practice, which is not optimal from a regulatory perspective, but from a cost and operational one can be logical, particularly for firms that don’t have battalions of technology staff.”
Much of the preparation “varies” among types of participant, says Chris Jenkins, managing director at vendor Tora.
“Some firms have invested heavily, and some have taken the approach to cover the bare minimum and make refinements in 2018,” he says. “I doubt many firms have implemented their ideal setup, and will use this year as an opportunity to improve.”
Indeed, the vendor landscape provides an interesting example of how Mifid II will continue to exert an influence on technology spend long after its implementation. Vendors, by dint of their nature, have been forced to undergo heavy technical work over the past year to ensure their products are Mifid II-compliant, a process that Mike Forst, director of platform services at Trading Technologies, describes as “a massive effort.”
However, as Mifid II beds in, the work hasn’t stopped. The implementation of the regulation, most say, will allow firms to move past bread-and-butter compliance work, and further into how to fine tune existing set-ups, potentially using emerging technologies.
“To meet existing regulatory requirements, TT is already applying machine learning to software solutions that detect potential market abuse by traders, and we certainly see more opportunities opening up related to Mifid II,” Forst says. “We will be actively exploring these after January 3, when the industry has had some time to fully grasp the impact of the regulation.”