Trading in the post-Mifid II environment

Trading in the post-Mifid II environment

Mifid II has presented firms trading in Europe with the greatest set of technological challenges in living memory, forcing them to upgrade their entire technology stack to ensure compliance.

Johannes Frey-Skött, VP Apps Engineering at Itiviti, the leading European trading technology firm, has been working with clients on Mifid for years now and concluded that a key challenge is handling the additional and massive data requirements linked to Mifid compliance.

Frey-Skött told Global Investor Group: “Part of the challenge is that post-Mifid II firms will be consuming a huge amount more reference data from regulators and trading venues and they also need to store for five years all client data and orders, trades and quotes if you are classified as a high-frequency trader.” 

Itiviti was quick to move on Mifid II. They picked up the Regulatory Technical Standards as they became available and made the required changes to its existing portfolio of technology products but realised early there was also a need for a standalone Mifid regulatory reporting tool, hence Itiviti Analyst.

Frey-Skött said: “Under Mifid II, firms will now have to populate orders with additional information among those, pertaining to investment decisions or the execution decisions which is information that these firms were not previously required to supply.”

He added: “To handle these requirements, the same firms need to make fundamental changes in the core of their products.”

There is also the thorny issue of Legal Entity Identifiers (LEIs), which every trading firm must acquire and provide to counterparties.

Frey-Skött said: “Firms handling client orders also need to manage the reference data for clients so the clients need to have a Legal Entity Identifier and the broker needs to populate these LEIs in their databases. That is a big challenge when combined with the requirement to maintain reference data for all the underlying instruments. There are also other requirements such as pre-trade and post-trade limits on size which are specific to instruments.”

The up-shot firms are facing is a huge regulatory reporting headache when it comes to sheer volumes of data they will be expected to process, Itiviti argues.

It is not only trading firms that are facing a huge data challenge however.

“We are in contact with many of the national regulators and I think there is a feeling that some regulators may be overwhelmed by the sheer volume of data they will receive through daily, quarterly and annual reports,” said Frey-Skött.

There was (at the time of writing at least) still some confusion over the direct electronic access (DEA) rules as drafted by the European Securities and Markets Authority, leaving some firms unclear whether they will be bound by the rules or exempt.

Frey-Skött added: “At a recent conference the Financial Conduct Authority said they think that quite a lot of investment firms will be surprised to hear that they are going to be classified under the DEA rules. There are currently exemptions to the rules but there are also exceptions to the exemptions. If you are trading on a Multi-Lateral Trading Facility in your own membership for example, or through a DEA set-up you must comply with record keeping requirement, which may come as a surprise for many companies.”

Frey-Skött said European regulators should exercise forbearance next year, reflecting the scale of the challenge faced by regulated firms.

“It is likely we will see some kind of grace period though we don’t know how long that will be,” he said.

“The FCA has said it is sufficient if you can demonstrate that you are making best efforts but, at some point, they are going to start fining.”

Mifid II then does not go away as a challenge when it takes effect across Europe on January 3. Itiviti said the market structure will continue to evolve and this will need to be reflected in its various technology services including Itiviti Analyst.

Frey-Skött concluded: “Next year, we will be continually watching the market structure, with a particular focus on the proliferation of Systematic Internalisers.

“Clients are already requesting meetings next year so we will be monitoring closely the market structure changes and reflecting those in changes to the Smart Order Router,” he concluded.

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