Financial companies that fail to upgrade their technology architecture to meet the demands of MiFID II will be unable to trade effectively.

The rush is on to adapt firms’ software to meet the forthcoming regulation revisions, including changes to how records of electronic transactions are kept and new rules to ensure data is collected, stored and transmitted safely and securely.

Ensuring technical compliance by the January deadline should have been a top priority for financial firms but this has not always been the case.

 

Priorities

 

“If your trading systems are not upgraded you won’t be able to trade because you will not be allowed to connect to markets, and you will struggle tocollect the data needed for reports,” says Jonas Lindqvist, Principal trading and Trade execution at Itiviti Group AB, a technology provider for the capital markets industry. “People wanted to buy a MiFID-compliant software plug-in to make their existing systems compliant but it is not as straightforward as that. You have to invest in the right up-dates.”

Many companies have invested in upgrades but others have been reluctant to update their technology until now. Itiviti Group AB has been busy leveraging its years of technology and regulatory expertise to explain to the industry the consequences of not adapting existing systems to meet the requirements of MiFID II.

“Firms are realising they must fine-tune their approaches to technology to meet their own needs once the new regulations take effect,” says Jonas Hansbo, CSO at Itiviti Group AB. “As a business we understand the requirements of MiFID II compliance and the technology needs of the market. We act as a partner, advising on what the relevant aspects of MiFID II are to help them become compliant and trade as close to their usual business activity as possible.”

Itiviti Group AB’s VP Engineering of Agency Trading apps, Johannes Frey-Skött, cites the conundrum of ensuring that the different platforms being used across the industry can still talk to each other from January. Some platforms have been supplied by independent software vendors while others have been built in-house. “This time the regulations will affect every asset class handled by an investment firm and that is a real technological challenge,” he says.

 

New world

 

The changing regulatory environment will place particular emphasis on the platforms firms use to connect to liquidity sources.

This changing environment places particular emphasis on the platforms used by firms to connect to liquidity sources. MiFID II may mark the end of the traditional demarcation between OMS and EMS platforms.

The OMS has traditionally been used to keep track of orders, order status and progress in working an order. 

When the order had basically one destination (i.e., a primary market for equities), the need to keep track of the various child orders was limited. The complexity of the emerging post-MiFID II execution venue landscape, however, calls less for a discrete system for sending orders to a destination and more for a platform that addresses work flow seamlessly without the need for multiple external applications.

MiFID I introduced market fragmentation in the equities space, but it was still a relatively easy task to route the order to an internal or external SOR. That meant some degree of OMS/EMS integration, mostly via FIX, but the systems were still essentially separate. With MiFID II and its focus on transparency, however, the requirement becomes more complex. 

 

Keeping records

 

Ultimately firms need the technology they invest in to help them become more transparent in terms of pre- and post-trade reporting while still effectively managing orders and execution.

This means any platform must meet the new record keeping requirements, enable algorithmic trading and monitoring; and support instrument and client definition management, time synchronisation and high frequency trading classification. It must also handle systematic internalisation needs, risk compliance and checks.

“The right technology will be future-proof and optimised for the new market structures,” says Hansbo. “Futureproofing has been a design philosophy for us from the beginning. In this industry technology has to be flexible and adaptable to change, and this has to be part of the core design from the start.”

He says that with MiFID II this means any platform must accommodate the new volume caps and high-frequency trading (HFT) classification, as well as broader concepts like the new venue types across all asset classes.

“These will affect how firms approach macro issues like staffing and more micro issues like the operational requirements of the OMS and EMS platforms.”

 

Efficiency

 

Lindqvist adds that with the pressure on firms’ margins, choosing the right technology to ensure smooth compliance with MiFID II could be an important market differentiator.

“With more transparency, customers will get a clearer view of what they are paying for and they will be able to compare the cost of different services more easily,” he says. “The right technology can improve efficiency,  save money and add business value as well as ensure regulatory compliance.”

 


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