Eddie Heaton talks MiFID II with Terence Chabe of Colt

What will market structure look like under MIFID II?

MiFID II will require immense changes to participants’ technology infrastructures and the deployment models of services used. Under MiFID II, the rules for direct electronic access to trading systems have been tightened. Only firms that can afford to upgrade their platforms and invest in extra bandwidth will survive in the market.

To that effect, we will see many buy-side companies (that usually have lower budgets than sell-side companies) partner with third-party software and service providers to help them fulfil these and other MiFID II-related requirements.

Small, specialist regulatory technology (or RegTech) firms are expected to play an important role in the market. According to a report from the analyst house Celent, these firms are best positioned to plug gaps in the technology portfolios of larger, more established players. Many capital markets companies will need to select applications to help with niche requirements, such as testing algorithms, real-time reporting to regulators and timestamping conversations to the millisecond.

MiFID II will also drive cloud adoption in capital markets. The growing need for extra data storage, flexible on-demand connectivity, and access to third party providers for specialist features and tools, has made the cloud an affordable, scalable and strategically important resource for trading firms to draw upon.

What will be the effect of equity pre- and post-trade transparency requirements?

MiFID II will impose greater demands on trading firms’ connectivity and their IT assets, including the amount of bandwidth they consume and their storage and in-house analytics capabilities. Transparency requirements mean that both buy-side and sell-side companies will have to report trades and transactions in much greater detail and granularity, but also at much greater scale. For example, market participants will have to report to regulators across more than 60 data fields. Exchanges have already had to upgrade their matching engines and service providers have needed to increase capacity in order to deliver larger amounts of structured and unstructured data for pre-trade.

What difference will MIFID II make for the customer?

Investor protection is the cornerstone of MiFID II. The directive will bring transparency and investor protection to all asset classes, making large brokers or banks with a market-making unit become Systematic Internalisers (SI). This means they will be required to provide additional volume and execution reports. Firms must be able to provide visibility and transparency to complex derivatives and have trades reported in real-time from exchanges and electronic trading platforms. Investors and customers of financial institutions will be safe in the knowledge that their trades are executed at the best price and that all records will be kept privately by regulators, so that any irregularities can be identified and the individuals brought to justice for any wrongdoing.

What are the key changes in transaction reporting from MIFID 1?

The main driver for introducing MiFID II is to increase the quality and quantity of data available to regulators and therefore, help them prevent market abuse and maintain orderly markets. The key MiFID II changes include:

  • Transaction reports must be made to an ARM, rather than a TDM
  • There are many more reportable fields than before, and increased focus on data quality
  • More asset classes are covered: In addition to equities and bonds (already covered under MiFID), commodities, currencies, and credit products and their derivatives are all in scope
  • Buy-side firms are no longer exempt from transaction reporting