In less than 12 months the EU’s Markets in Financial Instruments Directive (MiFID) will be replaced by MiFID II. The legislation regulates firms who provide services to clients linked to ‘financial instruments’ and the venues where they are traded. MiFID II will come into force on 3rd January 2018 and for firms impacted by the regulation, benefits are to be had by choosing data centre colocation and the adoption of ‘as-a-service’ tools as part of the adherence strategy.
It is certainly the case that there is a lot to distract firms right now. If preparing for MiFID II wasn’t enough, the financial services sector is facing the ongoing uncertainly surrounding the UK’s planned departure from the EU and likely withdrawal from the single market. Furthermore, there is speculation about the potential unwinding of existing regulation (most notably the US Dodd-Frank Act), following the new administration taking office in The White House.
However, exciting or daunting (depending on your point of view) the changing political landscape is, it does not affect the requirement for MiFID II compliance. Brexit isn’t a regulation ‘get out of jail free card’ as some have mooted in the past. Even if Article 50 is invoked tomorrow, UK organisations will still need to abide by new EU regulation, whether it be MiFID II or GDPR (General Data Protection Regulation), as both will come into force before the UK leaves, which will be 2019 at the earliest.
The scale of the impact MiFID II will have should also not be underestimated. The regulation will directly affect a firm’s trading infrastructure considerations on several levels. Most notably, it establishes a new category of execution venue, the Organised Trading Facility (OTF), which aims to level the playing field for the trading of non-listed non-equity instruments, alongside the Regulated Markets (exchanges) and Multilateral Trading Facilities (MFTs) established under the preceding MiFID I (which was introduced in 2007). From January 2018, any firm wishing to participate in these markets must be able to connect to the new platforms, and apply rigorous best execution policies to comply with the new rules, which put simply include…
- Robust records retention
- Pre-and post-trade reporting
- Highly granular time-stamping of orders and trades
The good news is that independent research from the A-Team Group mirrors our own anecdotal experiences, through the ongoing work we are doing with our capital markets customers. It would appear the marketplace is by and large in a state of readiness for MiFID II.
What’s more, as these organisations firm up their plans for MiFID II adherence (for those already in compliance with the Dodd-Frank Act it will prove less of an upheaval) many are choosing to remain steadfast in their preference to not burden themselves with the addition of more on-site technology and leverage the existing infrastructure and expertise by collocating and taking advantage of specialist services offered by data centres with expertise in the field.
Recently, my company has seen a considerable surge in demand at our London campus. Firms in London are attracted by the proximity of its locations to their base of operations, providing the low latency they require for their execution infrastructure, as well as the appeal of implementing key aspects of MiFID II compliance ‘as-a-Service’. Firms are also expressing a keen interest in various auxiliary services specifically related to MiFID II, namely highly granular time-stamping of trade data (firms must retain records relating to the entire trade lifecycle and be able to reconstruct transactions on request) and additional connectivity to further data sources and exchanges.
By making the decision to access as-a-service tools for MiFID II, the costs associated with the hardware and related infrastructure needed for system monitoring, time-stamping, testing and so on, can be greatly reduced. Meanwhile, some shrewd firms are actively exploring how to optimise their execution processes and ensure MiFID II compliance, to create competitive advantage in the marketplace.
Again, the traction we are seeing echoes that of the A-Team Group survey, in which 60% of respondents saw at least some value in their efforts to comply, while 30% are expecting the cloud to contribute ‘significantly’ to their MiFID II solutions. It is evident that the message from the regulator is being heeded, but more firms need to take a closer look at the approach of their peers. As the saying goes ‘There is doing the right thing and doing things right’!