With Christian Voigt, Senior Regulatory Advisor, Lewis Richardson, Derivatives Product Manager, and Henri Pegeron, Product Manager, Derivatives and Compliance, Fidessa
Christian: Firms should start to think of regulation as more than just a headache. Regulatory change is not a one-time event, it is a continuous process – once MiFID II is out of the way, there will be new regulations rolling out across Europe, Asia and the US. Firms need to work out how they are going to deal with the changes to regulation on an on-going basis and those firms that set up the right processes to prepare themselves appropriately will be best placed for the future.
As an example, MiFID I never mentions the words smart order routing. However, if ten years ago someone had read the details and understood what it meant for the market, they would have anticipated the rise of smart order routing in Europe. Those kinds of market opportunities will always be there for firms who are able to understand the implications of regulation.
From a US angle, how are firms developing to stay ahead of regulation?
Henri: To add to Christian’s point, firms with people who understand global regulation and its implications are ahead of the game. Much of the time regulations are looking to create rules after the fact. By having a clear understanding of what the regulators are attempting to accomplish, a firm has an advantage and knows that it can prepare to operate under those rules. The firms that can suffer are those trying to be reactive to regulation, as opposed to working with it and understanding that regulation is about creating consistency and efficiency. A firm that is continuously upgrading its systems in order to meet regulatory criteria is very unlikely to find the regulation as much of a headache and it becomes more of a maintenance exercise.
In the US, for example, the regulators have seen that some companies are creating opportunities in the listed derivatives market, as they introduce rules around registration and risk controls; if you have read the comments of the CFTC this should not come as a surprise. Those firms that understand that regulation is cyclical, and part of the business lifecycle, can read into the regulatory changes and create positive opportunities for themselves.
How can Asia-Pac firms become more proactive with regards to regulation?
Lewis: In terms of being proactive, it is true that Asian regulators and the exchanges are not moving as quickly as their US counterparts, and that is something international exchanges are trying to leverage. ICE has set up an exchange in Singapore to allow clients to leverage the regulatory arbitrage between Asia and Europe and the US.
Asian brokers also see an opportunity to try and get ahead of regulations where they see things changing in Europe and the US; certain clients are no longer able to work with European or US brokers and so many brokers in Asia are taking on that business.
Do you think that the impact of regulation is more strongly felt by smaller firms?
Lewis: Some of the mid-tier Asian firms are seeing ahead of time what is likely to happen in a year or two once regulations such as MiFID II come into force in Europe. They are trying to be proactive now. However, it is probable that smaller firms will struggle to keep up with the new regulations and the opportunities they create, as they won’t have the same economies of scale as the larger firms.
Henri: What is also interesting is the way the regulation has been written globally means that the industry is becoming ever-more standardised. The regulators are trying to standardise aspects such as risk controls, exchange rules, trade processing, order monitoring, compliance and reporting. A lot of overhead is created with these types of regulatory requirements, especially for firms that may not have been the target of regulation in the past.
Standardisation brings with it the opportunity to call in third party providers who can design consistent industry solutions. Instead of falling behind because you can no longer keep up with the regulatory burden on your own, standardisation opens up an opportunity – firms might want to reassess how they tackle it. The smaller firms in all regions, be they brokers or buy-side firms, will start looking towards using solution providers for many of their regulatory concerns.