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March 02, 2017
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Capital Markets Regulation in the EU evolves with MAR, MiFiD II..(1/3)

Today’s European financial markets hardly resemble the ones from 15 years ago. The high speed of electronic trading, explosion in trading volumes, the diverse range of instruments classes & a proliferation of trading venues pose massive challenges.  With all this complexity, market abuse patterns have also become egregious. Banks are now shelling out millions of euros in fines for market abuse violations. In response to this complex world, European regulators thus have been hard at work. They have created rules for surveillance of exchanges with a view to detecting suspicious patterns of trade behavior & increase market transparency. In this blogpost, we will discuss the state of the regulatory raft as well as propose a Big Data led reengineering of techniques of data storage, records keeping & forensic analysis to help Banks comply with the same.

A Short History of Market Surveillance Regulation in the European Union..

As we have seen in previous posts, firms in typically most riskiest part of Banking – Capital Markets – deal in complex financial products in a dynamic industry. Over the last few years, Capital Markets have been undergoing a rapid transformation  – at a higher rate perhaps than Retail Banking or Corporate Banking. This is being fueled by technology advances that produce ever lower latencies of trading, an array of financial products, differing (and newer) market participants, heavy quant based trading strategies and multiple venues (exchanges, dark pools etc) that compete for flow based on new products & services.

The Capital Markets value chain in Europe encompasses firms on the buy side (e.g wealth managers), the sell side (e.g broker dealers) & firms that provide custodial services as well as technology providers who provide platforms for post trade analytics support. The crucial link to all of these is the execution venues themselves as well as the clearing houses.With increased globalization driving the capital markets and an increasing number of issuers, one finds an ever increasing amount of complexity across a range of financial instruments assets (stocks, bonds, derivatives, commodities etc).

In this process, over the last few years the ESMA (European Securities and Markets Authority) has slowly begin to harmonize various pieces of legislation that were originally intend to protect the investor. We will focus on two major regulations that market participants in the EU now need to conform with. These are the MiFID II (Markets in Financial Instruments Directive) and the MAR (Market Abuse Regulation). While both these regulations have different effective dates, together they supplant the 2003 passage of the original MAD (Market Abuse Directive). The global nature of capital markets ensured that the MAD was outdated to the needs to today’s financial system. A case in point is the manipulation of the LIBOR (London Interbank Offered Rate) benchmark & the FX Spot Trading scandal in the UK- both of which clearly illustrated the limitations of dated regulation passed a decade ago.  The latter is concerned with the FX (Foreign Exchange) market which is largest yet most liquid financial markets in the world. The turnover approaches around $5.3 trillion as of 2014 with the bulk of it concentrated in London. In 2014, the FCA (Financial Control Authority) fined several leading banks 1.1 billion GBP for market manipulation. All of that being said, let us quickly examine the two major areas of regulation before we study the downstream business & technology ramifications.

Though we will focus on MiFiD II and MAR in this post, the business challenges and technology architecture are broadly applicable across areas such as Dodd Frank CAT in the US & FX Remediation in the UK etc.

The European Securities and Markets Authority’s (ESMA) headquarters in Paris, France. Photographer: Balint Porneczi/Bloomberg

MiFiD,MiFiD II and MAR..

MiFiD (Markets in Financial Instruments Directive) originally started as the investment services directive in the UK in the early 90s. As EU law # (2004/39/EC), it has been applicable across the European Union since November 2007. MiFiD is a cornerstone of the EU’s regulation of financial markets seeking to improve the competitiveness of EU financial markets by creating a single market for investment services and activities and to ensure a high degree of harmonised protection for investors in financial instruments.MiFiD sets out basic rules of market participant conduct across the EU financial markets.It is intended to cover market type issues – best execution, equity & bond market supervision. It also incorporates statues for Investor Protection.

The financial crisis of 2008 ( led to a demand by G20 leaders to create more safer and resilient financial markets. This was for multiple reasons – ranging from overall confidence in the integrity of the markets to exposures of households & pension funds to these markets to ensuring the availability of capital for businesses to grow. Regulators across the globe thus began to address these changes to create safer capital markets. After extensive work, it has been concluded from a political standpoint and has evolved into two separate areas – MiFiD II & MiFiR.  MiFID II expands on the original MiFID & goes live in 2018 [1], has rules built in that deal with breaching thresholds, disorderly trading and other potential abuse[2].

The FX market is one of the largest and most liquid markets in the world with a daily average turnover of $5.3 trillion, 40% of which takes place in London. The spot FX market is a wholesale financial market and spot FX benchmarks (also known as “fixes”) are used to establish the relative value of two currencies.  Fixes are used by a wide range of financial and non-financial companies, for example to help value assets or manage currency risk.

MiFiD II transparency requirements cover a whole range of organizations in a very similar way including –

  1. A range of trading venues including Regulated Markets (RM), Multilateral trading facilities (MTF) & Organized trading facilities (OTF)
  2. Investment firms (any entity providing investment services) and the Systematic internalizers (clarified as any firm designated as a market maker or a bank that has an ability net out counterparty positions due to it’s order flow)
  3. Ultimately, MiFiD II affects the complete range of actors in the EU financial markets. This covers a range of asset managers, custodial services, wealth managers etc irrespective of where they are based (EU or no-EU)

The most significant ‘Transparency‘ portion of MiFID II expands the regime that was initially created for equity instruments in the original directive. It adds reporting requirements for both bonds and derivatives. Similar to the reporting requirements under Dodd Frank, this includes both trade reporting – public reporting of trades in realtime, and transaction reporting, – regulatory reporting no later than T+1.

Beginning early January 2018[1] when MiFID II goes into effect – both EU firms & regulators will be required to monitor a whole range of transactions as well as store more trade data across the lifecycle. Firms are also required to file Suspicious Transaction Reports (STR) as and when they detect suspicious trading patterns that may connote forms of market abuse.

The goal of the Market Abuse Regulation (MAR) is to ensure that regulatory rules stay in lockstep with the tremendous technological progress around trading platforms especially High Frequency Trading (HFT). The Market Abuse Directive (MAD) complements the MAR by ensuring that all EU member states adopt a common taxonomy of definitions for a range of market abuse.

Meanwhile, MAR defines inside information & trading with concrete examples of rogue behavior including collusion, ping orders, abusive squeeze, cross-product manipulation,  floor/ceiling price pattern, ping orders, phishing,  improper matched orders, concealing ownership, wash trades, trash and cash, quote stuffing, excessive bid/offer spread, and ‘pump and dump’ etc.

The MAR went live on July 2016. It’s goal is to ensure that rules keep pace with market developments, such as new trading platforms, as well as new technologies, such as high frequency trading (HFT) and Algorithmic trading. The MAR also requires identification requirements on the trader or algorithm that is responsible for an investment decision.

MiFID II clearly requires that firms have in place systems and controls that monitor such behaviors and are able to prevent disorderly markets.

The Implications of MiFiD II and MAR –

The overarching intent of both MiFiD II & MAR is to maintain investor faith in the markets by ensuring market integrity, transparency and by catching abuse as it happens. Accordingly, the ESMA has asked for sweeping changes across how transactions on a range of financial instruments – equities, OTC traded derivatives etc – are handled. These changes have ramifications for Banks, Exchanges & Broker Dealers from a record keeping, trade reconstruction & market abuse monitoring, detection & prevention standpoint.

Furthermore, MiFID II enhances requirements for transaction reporting by including venues such as High Frequency Trading , Direct electronic access (DEA) providers &  General clearing members (GCM). The reporting granularity has also been extended to identifying the trader and the client across the order lifecycle for a given transaction.

Thus, beginning early 3rd January 2018 when MiFiD II goes into effect, both firms and regulators will be required to capture & report on detailed order lifecycle for trades.

Call to Action –

For those interested in a deeper look around Trade Surveillance, please review the recording from Hortonworks, Lloyds Banking Group, and Arcadia Data as we discuss the subject to a great degree of business and technology depth.

You can download the recording of the webinar at the below link:


Having set the stage, the next post will discuss key business & technology requirements for MiFid II and MAR Platforms..



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