06 Mar 2017

MIFID II AND REG AT: WHAT DO THEY MEAN FOR ISRAELI ALGO FIRMS?

Global regulatory changes are on the horizon. Is your connectivity up to scratch?

There was one trend you couldn’t avoid at this year’s FOW Tel Aviv. Regulation.

Algorithmic traders the world over are under the spotlight and there was plenty of discussion about the stricter controls being phased in by North American and European governing bodies.

As many of you will know, the first to discuss is Regulation Automated Trading, RegAt for short.

The proposed regulation will apply to all futures contracts algorithmically traded on US exchanges. Regulators hope this will reduce risk and drive stronger compliance across the industry.

MiFID II is even more talked about amongst the Israeli firms we’re working with. With similar intentions as RegAt, the original MiFID came into effect in 2007, promising to tear down the barriers associated with cross-border financial services within the European Economic Area.

Its successor’s objective is a more competitive, level playing field that protects investors. Transparency is the goal for regulators, especially within riskier marketplaces such as OTC (over-the-counter) trading.

Affecting Israel’s industry

Will Israeli trading firms escape the changes? It’s difficult to say. We asked many of our Israeli-based clients and found there’s still uncertainty in the industry.

Are non-EU countries exempt from MiFID II, for example? Findings from FOW’s recent Israel event found that local firms are some way into their MiFID II internal testing yet still to begin user testing.

What is certain is a firm’s headquarters no longer solely defines what regulatory jurisdiction an organisation falls under. Instead, the trading venues a firm is active on also specifies compliance requirements.

Furthermore, future alterations to MiFiD II’s structure could have a knock-on effect for countries outside its immediate geographical coverage, e.g. Israel.

RegAT goes a step further with ‘non-member traders’ – i.e. those performing automated trading on the behalf of clients.

Each non-member trader will be subject to risk controls, regulator registration and testing regimes. If those are not adhered to, trading futures algorithmically will not be permitted.

There are a host of other propositions being consulted on within the context of RegAT, but what the regulation demonstrates is how trading models and services can fundamentally change due to factors outside the direct control of the brokerage or trading firm.

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Delving deeper into MIFID II

Moving more to a macro level, it’s apparent that MiFID II will be disruptive. As Thomson Reuters explains, the regulation will affect the entire financial industry including, “brokers, dealers, trading venues, hedge funds, asset managers, and global corporations to varying degrees.”

Drilling down into the detail gives some indication how MiFID II will be put into practice. Some of the new processes will involve:

  • Reporting trades to local regulators

  • Only trading certain derivatives on regulated trading venues

  • Publishing quotes and post-trade information for trading activity across most asset classes

  • Extensively testing trading algorithms

  • Producing annual reports detailing the quality of executions

This blend of data collection, record keeping, technology and new processes will mean every aspect of a firm, from operational models to technical systems, will need adapting to meet the regulation’s specifications.

Underpinning everything will be technology, connectivity, proximity to the exchange and data security. Monitoring exchange performance, algorithm testing and delivering clients a compliant network backbone will be a crucial proposition for Israeli firms attempting to win new business.

At BSO, we’re working with Israeli firms to ensure their connectivity pre-empts compliance. Stable connectivity is particularly important within the context of trading resilience, platform testing and record-keeping purposes.

There is also a demand for better connectivity for growth reasons. During a panel discussion at FOW Derivatives Israel 2017, “liquidity, connectivity and market data” were named as key factors for driving more participation in the Israeli markets.

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Looking inward and outward

Returning to the context of the impending regulations, there’s definitely a growing appetite for greater market governance and improved connectivity in Israel.

The Times of Israel’s expose into “The Wolves of Tel Aviv” shows how coordinated malpractice can dent global investor confidence.

Dutch regulators, for example, are considering using MiFID II to ban binary options, as this interview with the Netherlands Authority for the Financial Markets (AFM) explains. This might be an isolated example, but it shows how European regulators can leverage MiFID II in the future.

So, what awaits? Extensive change. The extent of MiFID II’s effects are covered in depth by this law firm, but in short MiFID II and RegAT means modifications to trading methods, market access, client services, technology, people and the markets themselves.

There is little use putting your head in the sand. There is less than a year until MiFID II is implemented – 3rd January 2018. If you are active in Israel, now is the time to assess whether you have the necessary ‘connectivity trifecta’ to enable a smooth transition process:

A resilient global network, proximity to exchanges and secure data.

Let us know how we can help or whether you would like information on how we’re supporting other Israeli firms.

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