The Securities and Exchange Commission’s (SEC) 14 July deadline for compliance with its Rule 15c3-5, which governs pre-trade risk management, and the ongoing MiFID Review in Europe were highlighted as key concerns by panelists at A-Team Group’s Business & Technology of Low-Latency Trading (BTLLT) event in London this week. High frequency traders are especially concerned about the extension of MiFID to many new areas as a result of the review process, said Benjamin Stephens, electronic trading and quantitative prime brokerage origination at Nomura International.
Stephens’ own firm is examining its legal and technology roadmap for high frequency trading, he told delegates. The potential move of traditionally OTC asset classes onto exchanges has also meant a review of how the firm tackles IT infrastructure in order to realise as many efficiencies of scale as possible. “In many firms, equities desks are using the same algorithms, market data and feed handlers, and this consolidation is set to happen across asset classes as a result of regulation also,” he predicted.
To highlight the scale of regulatory change overall, Anthony Kirby, director of Regulatory and Risk Management at consultancy firm Ernst & Young, indicated that around 70 regulations are incoming in the UK over next 20 months, which could potentially cost the industry somewhere in the region of £5 billion in compliance spend. “The new version of MiFID has so many moving parts it's untrue,” contended Kirby. “It will also bring even more complexity to manage for other asset classes due to the extension of the directive to other assets such as commodities.”
As for the SEC’s incoming market access regulation, the regulator has laid down the gauntlet to the sell side by making broker-dealers expressly responsible for their own and their clients’ pre-trade risk management systems and processes. A-Team’s own Andrew Delaney indicated that many are investing heavily in pre-trade risk management technology in an effort to comply, despite the fact there is as yet no broad, industry accepted standard approach to this challenge.
Kirby also noted that the nature of risk management has changed dramatically since the financial crisis, along with practices around market discipline and regulatory structures. The regulatory community is now moving from directives to direct effect regulations, where firms are provided with a single rulebook, which could provide both clarity in terms of implementation and a straightjacket in terms of innovation, he said.
Risk management has extended to areas such as correlation risk and intensive stress and scenario testing, he added, and market discipline practices have come under the spotlight in terms of governance. Basel III will likely usher in a whole new approach to regulatory implementation, along with its risk management changes and high costs of compliance, warned Kirby.