The countdown to MiFID II is fully underway with only a few months until its implementation on January 3, 2018. However, ahead of its passage, a number of lingering concerns remain from firms regarding key deadlines and a general awareness of specific attributes.
MiFID II is poised to dramatically reshape the regulatory space in 2018. While firms have had ample time to prepare for the shift, many are still unprepared or have been slow to reconcile their upcoming compliance obligations.
A recent study from the NPL, the UK’s National Measurement Institute, corroborated this trend, suggesting that many firms could fall short of compliance by employing inefficient means of timestamping.
Leon Lobo, Strategic Business Development Manager, NPL, commented: “It is encouraging to see an understanding of the magnitude of the new regulations and a clear will from the UK finance industry to shape up for the regulation. However, what is equally important is to ensure that the efforts of industry are not wasted and there is a clear grasp of what level of accuracy constitutes compliance.”
The regulations are designed to facilitate greater market oversight, transparency, and reporting requirements. More specifically, this includes shoring up regulatory technical standards (RTS 25) that will necessitate that all trades be timestamped to Coordinated Universal Time (UTC) with a high level of precision.
To date, one of the most common methods currently used for timestamping is Network Time Protocol-based Internet Time – the study found that 56 percent of respondents employ it. This method is only accurate to the tenth of a second and while suitable for human trading, it cannot remain a solution for high frequency trading HFT and non-HFT. These methods require 100 microsecond and one millisecond accuracy respectively, under RTS 25.
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Steep fines for non-compliance
Subsequently, timestamps will need to be accurate to within 100 microseconds of UTC for HFT. Firms that are non-compliant with MiFID II regulations will risk fines of up to €5 million euros, or 10% of global turnover.
The report did indicate that top line awareness of MiFID II was high among those surveyed, with 91 percent of firms being aware of the regulation itself. However, while 75 percent of these claimed to understand the deadline for compliance, nearly 66 percent were unable to pinpoint the precise date for the new regulations.
Many surveyed individuals instead chose dates later than the January 3, 2018 deadline, suggesting that they would lapse on specific requirements. Consequently, this trend underscores the need for improved education across the industry in terms of MiFID II obligations.
Overall, the study included a panel of 200 professionals responsible for operations and compliance across the UK financial sector. This included a composite of banks, hedge funds, analyst firms, investment management firms, and data centers.
Moreover, the survey also highlighted the continued reliance on GPS for timestamping, with 14 percent of financial services professionals using it. By extension, nearly 79 percent of these individuals utilizing GPS experienced issues doing so. This included issues such as drop out, loss of accuracy, lack of synchronization, and leap second issues.
Under RTS 25, the optimal method to deliver a precise time signal is UTC delivery by fiber from a national timing institute. Overwhelmingly, consensus research has shown that fiber optics are more than up to the task of achieving accuracy better than 100 nanoseconds.
Unfortunately, just 21 percent of respondents in the survey were currently using this method to keep to time. 32 percent of those surveyed are however taking steps towards compliance, and endorse the new timestamping techniques. These figures still suggest that many firms will short of the regulations by the imposed deadline.
“Many of the current methods are problematic and opting to improve these will not guarantee the highly-accurate time standard which will ensure timestamps are easily certified,” explained Mr. Lobo.