Global change is afoot. The financial industry is currently implementing two regulatory proposals.
Both regulations will modify market governance, disrupt how the sector operates and affect access to US markets across the world. Those were some of the concerns raised at this year’s FIA Boca conference.
But first, what are the new regulations? As we explored earlier in the year, the first is Regulation Automated Trading (RegAT), a high-profile ruling being debated by the Commodity Futures Trading Commission (CFTC).
Put simply, the framework aims to increase market transparency in a controversial way. One of its main proposals is the demand that algorithmic trading firms reveal their proprietary source code to the watchdog.
As you would expect, there has been significant opposition. Back in November 2016, Walt Lukken, the President and CEO of FIA declared: “We cannot support the proposed source code provision. […] Source code deserves the same protections under the law as any other form of intellectual property.”
The CFTC countered this point a month later with the statistic that over 70% of trading in futures is now automated and thus it is necessary to modernise regulatory oversight. Which side of the industry is correct? Time will tell.
REGULATION AND TECHNOLOGY IS GLOBAL
The other regulation being implemented is Europe’s MiFID II – an even more comprehensive change to how global markets, traders and firms are governed.
At the heart of MiFID II is the intersection of technology and regulatory power – for example, MiFID II proposes that trading firms should report trades to local regulators and algorithms should be extensively tested.
This relationship between technology and regulation is interesting to analyse.
Within the context of US market regulation, technology is both an enabler and a disruptive entity.
It provides a powerful way to govern markets effectively and the ability to improve transparency. At the same time, technological changes are responsible for many new challenges regulators have faced in recent years.
In recent weeks, the discussion between the FIA and CFTC has intensified. In a letter to President Trump, FIA asked for a pause in the regulatory structure so an adequate review can be conducted and Lukken himself calls for three pillars of reform in:
- Smart regulation and enforcement
- Global access
- Promoting fair competition and innovation
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