RegTech Intelligence

A practical application of RegTech – meeting trading obligations

By January 2018, European legislation will have significantly changed the financial services sector. The sheer volume of transactions, products and firms affected by new regulation means that we can say goodbye to the trading landscape we currently know.

In particular, new rules under MiFID II will impact how and where market participants execute trades. All organised trading will be expected to take place on regulated trading venues or Systematic Internalisers (SIs).  To this end, Organised Trading Facilities (OTFs) have been created to capture broker crossing networks and other multilateral trading in non-equity instruments which does not currently take place on exchange.  Furthermore, with MiFID II seeking to put “an end to the rule of opaqueness, and an end to the reign of over the counter transactions”, under the new regulations, a significant portion of OTC trading will be moved to trading venues through a trading obligation for certain equities and derivatives.

All of this has produced a sea change in the trading landscape, whereby new requirements will be onerous, complex, and strict. Firms will need to prepare now for a January 2018 implementation date for MiFID II, and will need robust systems and processes in place to do so. Fortunately, the emergence of technologies such as Big Data, Artificial Intelligence, and Distributed Ledgers have the potential to alleviate much of this regulatory burden and manage comprehensive regulatory change better, faster, cheaper and safer. When applied to meeting requirements, these technologies fall under the banner of RegTech.

Before reviewing a handful of RegTech solutions to trading obligations, it is worth calling to attention how the trading situation will be affected by the recent EU referendum result in the UK.

Brexit implications

The FCA stated on Friday that UK firms must continue to comply with EU regulation for the considerable future, and must also continue with their preparation for incoming regulations such as MiFID II. It has also been argued that EU regulations such as MiFID II will continue to apply to UK firms regardless of the exit negotiations. This is for two main reasons; i) the UK was one of the main architects of the regulation, and ii) if firms want to do business in the EU, they will need equivalence with their regulations regardless.

In these circumstances, there is still very much a need for firms to prepare for MiFID II, MAR, GDPR, EMIR Level 3, PRIIPs, and T2S (all of which will go live before the two years of Brexit negotiations are up anyway), and many others.

But these are still uncertain times, and while in one situation the UK may remain subject to EU law, there is a possibility at the other end of the scale that we have up to 60% of our rulebook to rewrite in the coming future. As we believe RegTech is about harnessing collaboration and technology to deal with uncertainty and seemingly difficult requirements, the increased level of responsiveness provided by technologically robust compliance systems is exactly what an uncertain financial sector needs right now, given that the regulation of today may or may not be the regulation of tomorrow.

This also adds weight to the case that more than ever the industry needs to work together to develop common standards and harmonised technological processes, now another potential disparity in regulatory regimes is on its way, and the idea of increasing the bodycount in compliance departments to cope with this sends shivers down the spine. It is therefore important to review and assess the current options out there with RegTech, particularly given that the world of policy is one thing we can all expect to be heavily turbulent over the foreseeable future.

New solutions

There is an abundance of RegTech which attempts to alleviate the burden of meeting trading obligations. One example of this is the use of Big Data to track a firm’s trade flow versus real-time market data to prove best execution, complying with the revamped requirements under MiFID II. In addition, algorithmic solutions have been developed to help buy-side firms with MiFID II inducements and unbundling rules, whereby a rules engine dynamically calculates research charges at allocation level for an asset manager. Data distribution models offer PRIIPs KID compliance by allowing asset managers to efficiently allocate the right data to the right people. Voice-to-text conversion software allows for compliance with Dodd-Frank disclosure requirements, while a host of startups have enabled firms to offload reporting obligations under EMIR, MiFID II, and many other regulations.

Looking forwards, obligations such as record keeping and timestamping could be met with the use of Distributed Ledger Technologies, which could provide fully transparent audit trails to regulators on demand. Collateral exchange and currently manual risk mitigation techniques can also be tackled with the arrival of smart contracts and their enforcement of binding agreements through computer protocols.

Semantics and regulatory awareness

Despite these developments, there is a definite case that if firms are to manage the sheer weight of upcoming rules, they must have the ability to handle multiple regulations strategically and simultaneously.

For example, the Algorithmic Trading obligation under MiFID II is interdependent with MAD/MAR obligations which require policies in place to detect market manipulation at the earliest stage possible, and the real-time monitoring infrastructure and underlying data framework used to meet these obligations could also be used to comply with the best execution policies and other trading and conduct obligations. Yet without proper awareness of these interdependencies, firms will remain stuck reacting to one regulation after another, continually updating their systems and bleeding resources at the same time. To tackle this, we need a holistic view of the regulatory landscape so both regulator and regulated can be proactive.

There have already been plenty of efforts in the RegTech space to tackle complexity and paint a clearer picture of the regulatory landscape. Speaking at a RegTech conference, BBVA’s digital regulation expert has called these initiatives ‘regulatory awareness solutions’, which use semantic analysis tools to automatically update regulatory requirements. These include, for example, JWG’s RegDelta platform, which itself won an award when helping the Royal Bank of Scotland compile a list of key Business Requirements Documents (BRDs) consisting of proprietary instructions for complying with a set of regulatory obligations. JWG’s partner, GFT, has since gone on to convert this product into a scalable solution that can be tailored to any financial actor looking to stay on top of change.

Looking to the future, IBM’s Watson is already assisting lawyers by searching records of laws and court cases to determine which ones apply to a current case. Business development leader Neil Sahota has stated that the computer could perform a similar function with regulations – “You could teach Watson what the regulations actually are,” he said. “They change in real time, and Watson could keep abreast of that. You could ask Watson to do a verification check to see if you are out of compliance.”

Such an idea fits in with our proposal to the UK regulators to adopt a robo-rulebook – with rules being made machine-readable and interactive, so anyone can query through a protocol what requirements they are subject to and how, exactly, they should comply with them. The FCA are already indicating moves in this direction, so this is an encouraging area to watch.

Where the domains come in

Despite movements all over the RegTech landscape, some of these technologies, particularly DLT, are still in their immature stage. Thus, it is important for the industry to decide which domains should be focussed on in the short and long term, and develop the standards accordingly. In this manner the technology can be developed in a safe and structured manner, absent from interoperability issues.

As we stressed in our previous article, we cannot focus attention on scaling up all these solutions at once. We recommend the establishment of an industry committee to prioritise the key RegTech domains and their requirements, and an implementation steering group for each domain.  Concentrating on the domains of solution for different applications of RegTech would help the conversation by pairing the right technology to the right challenges at the right time.

During our conference on the 5 July, we will be further discussing how technology can and is being deployed to meet trading obligations, and how to strengthen current efforts, with a range of experienced experts. Panellists confirmed so far include Stamos Fokianos (Managing Director, Global Head eBusiness, Crédit Agricole Corporate & Investment Bank), Dileepa Karunadasa (Executive Director – Investment Bank Programme & Portfolio Manager, UBS), John Neasham (Target Operating Model Data Architect, Deutsche Bank (invited)), Fred Tingey (Head of Regulatory IT Architecture, BNP Paribas), and Collin Coleman (CEO and Founder, Abide Financial).

As we will also be discussing how solutions should be prioritised (the RegTech domains), and are holding a separate roundtable to discuss the application of RegTech to trading obligations, it is an event sure to promise progress and signs of direction. You can view the full agenda, and sign up, here.

*July conference panel

12:05 Panel: Practical application of RegTech – meeting trading obligations

  • How will regulations, such as MiFID II, affect the trading infrastructure?
  • How can compliance costs be reduced?
  • How can Big Data, Smart Contracts, Distributed Ledger Technologies and interoperability standards help?

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