Terence Chabe, business development manager, Colt PrizmNet, and John Sullivan, head of Capital Markets USA, at Colt Technology Services talk to Profit & Loss about the challenges posed by Mifid II compliance.
Profit & Loss: Are you currently seeing a disparity between different market participants in terms of how ready they are for Mifid II?
Terence Chabe: The sell-side seems to be more ready for Mifid II, as they’ve made an investment to ensure compliance. It’s really on the buy-side where we see less preparation, and they might not necessarily have the same infrastructure or funds available to make sure that they’re compliant with some of the technical requirements of Mifid II.
P&L: Do the buy-side understand their requirements under Mifid II? In a recent survey fund managers globally said that their biggest challenge regarding Mifid II is uncertainty about what the rules contained within the regulation actually mean, both their scope and substance….
TC: A lot of the buy-side do rely heavily on their prime brokers to provide particular services, but I think the main area that’s going to affect the buy-side is the regulatory reporting requirement.
John Sullivan: Since 2008, firms in the US have had to adapt to the Dodd-Frank regulation, which includes reporting requirements. So, for firms over here that understand the regulation and the reporting requirements, it’s just a question of whether they’ve made the necessary investment to get their reporting set up the way that Mifid II requires.
TC: A lot of the time, these buy-side firms are waiting to make this investment because there are constant changes coming from ESMA about the requirements. But, at this point, Mifid II – which has already been pushed back by a year – is not going to get pushed back any further. So, these firms are now looking for a one-stop-shop solution with regards to their reporting requirements.
P&L: What major changes are firms having to make ahead of the Mifid II deadline?
TC: Well, there are certain things that firms need to have in place before January 2018, like Legal Entity Identifiers (LEIs). There are a lot of requirements around best practices, and one impact of these is that European exchanges are having to report more fields and firms are having to report more personal information.
Right now, a lot of buy-side firms use the Internet for connectivity to venues or to their prime broker. But this isn’t as stable or secure as using a financial extranet, which could be a concern when reporting personal or post-trade information. Using a financial extranet also enables firms to have one connection that allows them to report and receive data, and to connect with their prime broker.
P&L: How much of a compliance burden is Mifid II for these firms?
JS: It’s significant and that’s why right now the compliance groups are the ones actually driving the behaviour at these firms. If it was left up to the staff in charge of infrastructure and technology, they would probably delay a lot of the changes that they need to make.
P&L: Is achieving compliance also a significant financial burden for these buy side firms?
JS: Yes, because under the new rules, when they’re putting through a transaction, every single component of it has to be recorded and that costs a significant amount of money.
P&L: We’re now six months out from the compliance deadline for Mifid II, how have the conversations you’re having with clients changed as we approach this deadline?
TC: From my perspective, we have a lot of exchanges and venues coming to us requiring more bandwidth for connectivity. Not only that, but customers of these venues need the capacity to consume that higher bandwidth, so we’re speaking to both sides about the higher data volumes that need to be reported. We’re also talking to customers about being able to consume and manage data in a consistent way.
JS: The larger firms are a pretty well-oiled machine and they’ve been learning about this regulation for the past 18 months, so none of this is a kneejerk reaction from them. It’s the smaller firms that might struggle.
P&L: What are the biggest concerns that you’re hearing ahead of the deadline?
JS: It’s always about the money. The major concern is the expense of the penalties if they don’t make the deadline. Also, if a firm gets whacked with a serious penalty for Mifid II non-compliance then that could put someone’s career in jeopardy.
P&L: With different trade reporting requirements in the US, Europe and Asia, is regulatory landscape becoming too complex for some firms?
TC: It depends on what they’re trading. Each buy-side firm has a different style and strategy. So, systematic funds and electronic trading firms that are trading across multiple venues require more technology, infrastructure and global deployment than, say, a long only asset manager that is holding positions for a lot longer.
A lot of the electronic trading firms are moving towards being in co-located facilities where the matching engines are, so it’s quite easy to cross-connect into the matching engine and the service provider that are all in the same data centre. So, there’s more requirement for infrastructure and the connectivity between the different data centres.
P&L: Do you think that there’s a chance that a significant portion of the market won’t be ready for Mifid II come January?
TC: I don’t think so. There are a lot of service providers that are catering to the smaller firms and a lot of their order management and execution management platforms are upgrading their services and providing more solutions to their existing customers. I think that people are proactively trying to help their customers and going forward, I think there’s going to be less onus on the prime brokers and more on the service providers to help firms navigate through the regulatory requirements.
JS: I think that in Q3 you’re going to see a surge of people making sure they’re up to speed because this is when the compliance checks and audits will start to happen and that’s what will really drive behaviour.