Christian Voigt: My job is to gauge the impact of regulation on the solutions and services provided by Fidessa and determine how to enhance existing functionality or introduce new products in order to help our customers to continue offering a compliant service. At the moment, MIFID II is very much at the forefront of my mind. It’s a challenging task because of its significant impact on the industry and a very tight implementation schedule.
HoT: In what ways have new regulations affected the relationship between the front, middle and back offices in the clients you service?
CV: Those relationships have become much more complex, but also more closely integrated, since a lot more information must be exchanged between those systems. Just look at how the middle and back office have been severely affected by EMIR, which ultimately also had some knock-on effects for the front-end. Nowadays, it’s not enough to understand your own system; you also need to consider your place within a larger ecosystem. Our customers, particularly the larger ones, do not only use Fidessa, they also have many different systems fulfilling all sorts of functions. So we have to integrate within their frameworks and support a common approach. Such a common approach does not mean that we all have to provide the same solution, but it means we have to agree on some common standards.
HoT: How can technology help firms overcome the difficulties caused by regulation?
CV: Regulation tends to increase complexity and technology can manage that. For example, prior to MiFID 1 we effectively had a few incumbent exchanges, hugely tied to their own country with a dominant position. Nowadays there are many more trading venues with multiple market models, be it central limit order books, wholesale trades or non-transparent order books. Combining that with the huge number of tradeable instruments, the complexity of customer demands quickly multiplies to a point that would be impossible to manage without technology. As a consequence of MiFID 1, we have seen equity markets fragmenting significantly, but smart technology helps to identify where the liquidity pools are. Today, sell-sides can easily and conveniently view markets in a consolidated fashion, regardless of any fragmentation.
HoT: What are the ramifications of the next wave of MiFID and EMIR?
CV: Today we have EMIR and MiFID, with the MiFID II implementation arriving very soon. Interestingly, there is already a discussion about whether to start work on EMIR II, but the question is really whether that will happen immediately or in a few more years. Going forward we will see, on a regular basis, laws to be reviewed and consultation processes being kicked off. Looking at the big picture, regulation exists to protect markets, provide confidence in the quality of the market, and safeguard the efficiency of markets. It is in everyone’s interest that our markets grow and the responsibility lies with the regulator to provide rules and regulations that enable growth on a sustainable basis. Therefore, there will always be a next version of regulation, in the same way as there will be a new wave of market innovation. What we saw in recent years was a financial crisis that convinced the public that an overhaul of financial markets was needed. However, as we now implement all those new requirements, the industry focus must return to its core business while managing its regulatory requirements continuously alongside.
HoT: Are we seeing evidence of smaller firms being unable to cope with the sheer weight of required reporting?
CV: It’s always been a challenge for smaller firms to comply with some of the more burdensome requirements such as the MiFID II or EMIR transaction reporting. Operating from much smaller bases the regulatory cost is more difficult for them to bear. However, mid-tier brokers also have some opportunities. Around the globe there are currently a lot of different rules implemented in different regions. In just one example, the US and Europe are still trying to find an agreement whereby they recognise each other’s CCPs and allow global brokers to clear their cross-country derivatives trades in a compliant fashion. If you are a large bank you need to worry not only about European rules, but marry up Singapore, Hong Kong, the US and South America regulation to a global super set of rules. That in itself is very challenging. Being a small firm does not mean that you are at a systematic disadvantage, it simply implies that you have to identify your strengths and a regional niche that you can dominate. In the end, we have to recognise that regulation affects large and small firms in different ways.
Are there any positive ramifications of the new regulations?
CV: Yes, I definitely think so, because regulatory change is not only associated with cost and burden but also with business opportunities and growth potential. MiFID II will require nearly every firm on the street to evolve. While some firms will look into making marginal improvements to achieve compliance, many firms actual use that opportunity to review and adjust their overall framework in terms of how to service their clients. The fundamental changes in regulation will result in significant shifts in market structure. Firms that understand the impact and anticipate trends correctly will be successful in increasing their market share and profit margin in the new environment to come.
HoT: To what extent are firms now in a position to comply with recent new regulations? What percentage of firms are now ready to comply?
CV: I doubt there are many firms that can confidently say that they are complying with new regulation which still has to be implemented. By their very nature new requirements trigger updates, be that in terms of processes, governance or technology. The concept of compliance is something difficult to judge and often more complicated than a simple yes or no. Not all regulation is prescriptive and straightforward to apply; some of the requirements are open to interpretation and depend on the specific use case within a specific firm. We have seen a lot of very complex scenarios where the judgement of compliance triggered some thorough internal debates. Certainly our customers are striving to meet the deadlines for MiFID II or any other regulation and we’re doing everything we can to help them with that.