Blog, MiFID II:Articles

Reflections from a RegTech Masterclass

By Geraldine Gibson

I recently had the privilege of speaking at a ‘RegTech Masterclass’, hosted by Burges Salmon in London, where top of the agenda was the subject of MiFID II. This is perhaps not surprising, given that MiFID II impacts so many areas across the financial markets industry, touching every part of the trading logistics chain: from front, through middle, to back office; including pre-trade, at-trade, post-trade, risk management, clearing and settlement. Which means that, if firms are to be fully compliant, system overhauls are likely to be inevitable in some areas.

Consistency of trade-related data

It became clear from the discussion that one area where firms are planning significant changes to their systems is around maintaining the consistency and granularity of trading data.

The reason for this is that under MiFID II, more data points need to be captured and tracked throughout the lifecycle of the trade. The trader ID code for example, which is generally tagged in the original FIX message in current environments, is often not tracked onwards through settlement and accounting systems.

Under the new regime, this could cause a number of problems for firms when conducting any kind of post-trade monitoring, particularly in situations where trades have been allocated & settled and positions rolled. This is where RegTech steps in. Through RegTech the technical solutions to meet the complex granular regulatory requirements of MiFIDII are readily available over the cloud at the touch of a screen.

Algorithmic Trading and DMA

Another topic that came under discussion was the prospect of sell-side DMA (Direct Market Access) providers being increasingly disintermediated under MiFID II.

In recent years, the buy side has generally relied on execution algorithms and DMA provided by their brokers or their banks, typically exchange members. But under MiFID II, there is increasing scope for the buy-side to bypass their brokers, if they have their trading systems and exchange memberships set up appropriately.

It is not clear yet whether this will become a trend. But buy-side firms who do follow this approach will not only need to take ownership and responsibility for their trading infrastructures (rather than relying on those provided by their brokers), but from a MiFID II compliance perspective, they will also need to have the necessary systems and controls in place to prevent those systems from disrupting the market.

Simplifying regulatory complexity

One topic that was actively discussed was how firms could go about simplifying cross-jurisdictional regulatory complexity. On top of MiFID II, every national competent authority will have its own regulatory documentation that firms must comply with, so what can firms do to better understand that documentation, and ensure that their systems comply with the regulations not only of their own jurisdiction, but also of other countries and regions where they do business?

The answer is simple. Let the machines do it.

This is where AI (Artificial Intelligence) and natural language understanding come in. Machines can be programmed to perform language matching, using fuzzy logic to find where specific words and phrases prevail in a document. They can then bring back the results into a nice dashboard for the end-user, giving the ability to see across all jurisdictions (for the venue they’re trading on or the instrument they’re trading), which regulations or which parts of MiFID II they have to comply with, and how.

Risk control in the spotlight

The general consensus was that greater supervision is becoming the trend, and technology can help greatly with that. The regulators are keen to get rid of manual data intervention, and want to remove the heavy reliance on spreadsheets for reporting and compliance, where there is too much scope for manual error.

Greater automation will lead to greater auditability. Having the right regulatory technology in place will enable regulators or compliance staff to go to a specific point in time to see what a piece of data looked like when they need to, and given them far greater certainty that the data is correct.

The over-riding conclusion of the masterclass was that RegTech is only going to become more important. It is likely to be the enabler for instilling and maintaining a culture of good conduct and control across the organisation, which in turn translates not only into better regulatory compliance, but more importantly, into good governance.