MiFID II is the next revision of the original MIFID legislation which came into force in 2007. Despite many delays in implementing the regulations - and ESMA (European Securities and Markets Authority) pushing the final date back to allow those affected to fully prepare; it will enact on January 3rd, 2018.
The scope of the legislation is focussed around financial institutions such as investment firms, Multilateral Trading Facilities (MTFs), Regulated Markets (RMs), High-Frequency Traders (HFTs) and a new category - the Organised Trading Facility (OFT). This list is not exhaustive and many financial firms and reporting institutions are affected.
The MiFID II requirement underpins the need for more transparent and robust methods of recording, handling and reporting of transactions, orders and other data. Other areas of focus are testing of liquidity algorithms and time-stamping.
Trading technology practitioners will need to assess their current infrastructures to ensure key areas such as connectivity, hosting and testing environments through the transaction and order process give rise to MiFID II compliance. Data technologists may be required to carry out a gap analysis to identify holes in the data and in the methods of its collection.
So let's look at the main key areas affecting technologists in further detail:
Under MiFID II the time-stamping of orders and trades must now meet that of high-speed trading standards. In pursuance of accuracy and the eradication of differentials in timestamping between different gateways and venues, the time keeping facility on trading servers and clocks must now be synchronised and standardised against the global time reference of UTC. The solution will not be a "one size fits all" for trading venues - different types of firms will be subject to different variables in the accuracy of timestamping. For example, the fastest high-frequency traders will only have a tolerance of 100 microseconds from the UTC benchmark.
The most popular usage of time recording is a GPS solution. Despite GPS having limitations around the placement of antennae, interference and jamming. For many firms, this is still their chosen method of capturing time and are still happy to continue with a GPS-based solution.
So in terms of infrastructure, what does this mean? These new timestamping standards of 10 - 100 microseconds will require an infrastructure upgrade for most trading firms. Regardless of whether a trading firm uses GPS or any other time source, there is a requirement to fully document the setup and methods of their timestamping infrastructure allowing full traceability of the process. Provenance to auditors that time can be accurately traced back to UTC will be required to reach MiFID II compliance. Not only does the new standard affect infrastructures, but also end user applications will have to be developed to record timestamps of that length. Even at this stage, many technologists are aiming to future proof their technologies in preparation for the next round of regulation, allowing their systems to be able to record time down to a nanosecond.
Increased level of data capture and reporting
The new directives bring a whole new rubric of reporting. Previously, under MiFID I the requirement was to report post-trade prices only. For MiFID II an increased level of data collection and reporting is a requisite. For example, transactional reports that once contained circa thirty fields, now contain sixty-five.
Now let's consider data quality standards - as many different data sources are being consolidated from variant systems; data consolidation, formatting and validation methods will also need consideration. Sufficient data reconciliation and monitoring services to ensure effective data governance and integrity are also high on the list of MiFID "to-dos" The upshot is poor quality or incomplete data is likely to be rejected outright, with the FCA monitoring report rejection rates identifying firms that repeatedly re-offend.
Transactional reporting at this time requires the largest level of investment, these at their very core, are legal statements tracking the transaction. It is estimated that Tier 1 & 2 firms will be expected to spend in excess of $10 million on transaction reporting to ensure compliance.
It is recommended by many sources that firms should be prepared for the transactional reporting arm well before the end of 2017. Some firms may have got a head start by collecting data for transactional reporting in compliance with the original MiFID I.
Co-location, proximity, latency and the requirement of best execution
Co-location and data centre proximity will have a direct effect on how technologists approach hosting and infrastructure strategies to accommodate MiFID II. With the legalities and importance of best execution being at the heart of MiFID II, it is key that technologists must keep this in the back of their mind when priming solutions and infrastructures. The complex software application of the gateway needs the connections and exchange information to hit without latency in order for accurate real-time order transacting - it is imperative that once a bid is reached the item is removed from all other trading venues. Not only does software design and gateway access need to cater for the nuances of a broad number of trading venues, a patchwork of connectivity must also be addressed. Considerations regarding the potential new trading landscape and the additions of new venues to the mix may also effect the number of venues that require proximity to data centres for the reasons of latency. The co-location scenario must also be addressed - the mix of regulated and none regulated venues sharing the same space is likely to mean that supplementary and auxiliary hosted services must be put into place.
Overall, the onus on practitioners is to ensure that the existing trading infrastructures are optimised and MiFID II compliant. The cost of these changes may have created the delay in take-up from firms, however many are harnessing cloud technologies and looking to apply "as a Service" solutions, or delegating to third parties in order to be more cost and time effective when achieving compliance.