Deutsche Börse Group’s index activities are performed by the subsidiary STOXX Ltd. For our customers, this means one single point of contact for ...
By Holger Wohlenberg, managing director, Deutsche Börse Market Data and Services
MiFID II, MiFIR, CSDR, SFTR, MAD/R – The amount of new regulation due in the near future will have a large impact on the infrastructure, resources and budgets for market infrastructure providers and their participants. The ubiquitous acronyms add complexity and difficulty around every corner for all participants, and any potential synergies between regulations, or cost savings are unclear at this stage. Seen from the regulators’ perspectives the task appears even more herculean, policing all financial markets to fulfill the G20 mandate of preventing another financial crisis.
Early communication and preparation is crucial to the successful transposition of upcoming regulatory requirements. During 2015, we have been running close working groups with the industry and regulators in London, Paris and Frankfurt, the aim of which was to address the key challenges faced by market participants and regulatory authorities, so that they may work together on potential solutions.
A market infrastructure provider – like Deutsche Börse - has to look at market regulation from all angles, adjust to new regulation itself, and carry the burden of changing systems, interfaces and workflows like every other participant in the market. Additionally, since such organisations work with a range of market participants on the buyside and sellside, and are closely liasing with regulators, there is a role to also facilitate dialogue where possible around all elements of regulatory change.
And we are seeing the markets changing in three main ways. Firstly, we expect that in time most of old-style over-the-counter (OTC) trading will be transformed or even partially vanish. Standard derivatives must be settled via a central counterparty (CCP) based on the Clearing Obligation declared by regulator Esma. If sufficient liquidity is achieved in an instrument, they shouldn’t be traded OTC anymore, as outlined by Esma’s Trading Obligation, with trading instead taking place on a new type of venue, an organised trading facility (OTF).
Secondly, traditional roles are shifting in the bond markets as well, with the banks being squeezed by capital requirements and the buy-side perhaps starting to play a larger role. Furthermore, under MiFID I and now MiFID II, investment firms dealing in securities or derivatives and holding sizable positions on their own account must register as a systematic internaliser (SI), which are mandated to comparable pre-trade and post-trade requirements as the trading venues.
Third, the new style regulations aim at being forward looking and risk reducing. In order to mitigate credit risk, all-encompassing trade collateralisation is the regulators' answer to the financial crisis. The next wave of regulation, recently passed by the European Parliament, covers the securities financing transactions (SFTR) to make sure that collateralisation works in practice across all parts of the market.
Over the past two years we’ve seen new regulations start to roll-out in Europe, with the market responding to the new obligations. In 2014, trade reporting under Emir kicked in, and in 2015 Remit rolled out mandating the reporting of energy products – spot and derivatives – to a certified Registered Regulatory Mechanism.
2016 will be another interesting year for regulation. The regulatory roadmap is continuing to impose additional reporting requirements for market participants in many markets and for a growing instrument scope, and the next link in the chain is of course MiFID II/MiFIR. Like the previous regulations, the key is going to be "prepare, prepare, prepare."
While we saw a recent change in scope for MiFID II for collective investment and pension fund managers, transaction reporting under MiFID II will be significantly more complex and broad in scope than under MiFID. And while delays seem a reality, it’s still important to ready businesses for the change in regime.
At a recent workshop we ran with market participants on MiFID II/MiFIR, we discussed that it is imperative for firms impacted by MiFIR to understand these key areas: the scope of the regulation, have a working knowledge of the processes and systems, understand what information and data available and what the reporting requirements are.
Fundamentally, regulators want to know which risks reside in the financial system. They expect reporting mechanisms to provide investors with real-time information on market transactions across all execution venues, covering all asset classes.
Technology is a game changer in this respect. If you can apply digitalisation and automation to the regulatory process it can greatly assist in providing robust, complete and reliable data in a timely and efficient way. Up until recently it simply wasn’t feasible or viable to master the sheer amount of data created by millions of transactions each day. In the era of Big Data technologies, that’s changed and computers and data storage facilities can comfortably handle terabytes of data flow. Despite the challenges posed by the waves of regulation, real progress is being made in giving regulators greater oversight. And we expect there to be more progress in 2016 as regulators, market participants and market infrastructure providers continue to work closely together.