Among the major themes discussed during the “Global Regulatory Update” panel at the June 23 FIX EMEA Trading Conference were improving data quality, streamlining reporting requirements and promoting global collaboration on standards.
As echoed by Fabrizio Planta, Head of Markets and Data Reporting Department at the European Securities and Markets Authority (ESMA), “For us, the general direction is improving data quality, trying to reduce the cost of reporting, avoiding duplication of reporting, and reusing international standards as much as possible in multiple reporting regimes.”
The Push for Harmonization
For smaller markets such as Australia, harmonization is arguably even more of a priority. As Calissa Aldridge, Senior Executive Leader, Market Supervision at the Australian Securities and Investments Commission explained: “As a smaller market with lots of international players, we need to make sure we adhere to international standards to reduce their costs. We’re seeking to limit additional data standards.”
“We’re a big advocate for landing on some international standards and having as much overlap as possible between the major jurisdictions,” she added. “We’re conducting a consultation for OTC trade reporting to simplify and harmonize the standards we’re using, the fields and the way those fields are populated. We think about it as a Venn diagram, we’re trying to get as much overlap as we can with the US and Europe, and that includes the UK.”
The one jurisdiction that may buck the trend for divergence is the UK, which has pledged that it will not be a “rule taker” from Brussels post-Brexit.
“We are now focused on using the greater autonomy we have in setting regulatory standards to focus on what works for the UK markets,” explained Stephen Hanks Manager, Markets Policy Division at the UK’s Financial Conduct Authority.
Still, the primary focus of the FCA “on making markets work better, ensuring our firms’ conduct improves and dealing with instances of harm,” remains unchanged. “ We’re not going to willfully move away from particular approaches which are used on a more global basis, but we have to work out what works from a UK perspective and how that fits into the wider picture in terms of regulation of data or any other topic,” said Hanks.
On Prescriptive vs. Principles-Based Regulation
In response to an audience poll in which the majority stated a preference for a principles-based approach to regulation over a prescriptive one, Planta warned this might not be to firms’ benefit. “When we talk about data, going for a more principle-based regulation would significantly increase the compliance cost of firms, so I’m surprised by this response.
“What we have proved with our regulation on data is the more we prescribe up front, the less the implementations and the compliance costs and the higher the quality of data. If we define from the start the XML message you need to use, you just need to translate it into your IT systems, without the need to interpret the provisions and hire lawyers to understand how to actually report.”
Dealing With Greater Retail Participation
Another major topic of discussion was how regulators planned to deal with the spike in retail participation in the wake of the Covid-19 pandemic.
“We see greater retail participation as a positive development,” stated Aldridge. “It’s a great outcome for new investors as they start to invest in their financial futures and benefit from the rise in asset prices. It’s really important for markets too in terms of varied sources of liquidity. But there’s no question that it has also created risks.
“The coordinated, social media-led actions that can generate extreme price movements is one example. But we’ve seen a real increase in things like copy trading, which has got a range of conflicts of interests and there are incentives emerging to trade away from exchange markets.
“For us, it’s not about changing regulation so much as educating and engaging those new investors and adapting the way that we do our monitoring and surveillance. We’re enhancing our surveillance capability, accessing more social media data and trying to enhance the way we automate some of the analytics to look for trends and thematics in the chatter, so we can try to get ahead of what’s happening.”
Adapting Regulation to a Hybrid Work Environment
One more pandemic-related theme was the need to adapt regulation to meet the needs of an industry characterized by increasingly hybrid work arrangements, with staff given greater freedom to continue working from home.
“We now know a certain amount about how a controlled environment works when most people are working in the office and when most people are working from home,” said Hanks. “But it will be important for us to understand the challenges for controlled environments within firms when we have a split between working in the office and people working at home.”
ESMA Will Offer Leeway on RTS Implementation
Also touched upon was the challenge faced by the industry in implementing ESMA’s revised regulatory technical standards (RTS) under the European Market Infrastructure Regulation (EMIR) Refit. “The objective of the revised RTS and EMIR Refit is simplification of reporting logic, introducing internationally agreed reference data, and improving data quality,” said Planta. “It is a complex regime and guidelines will be needed to facilitate the implementation. We are cognizant of the implementation challenges the industry faces and know it will require time. This is why we have proposed delaying RTF applications by 18 months and working to have guidelines in place in time for the applications.”
“The upcoming review of RTS 1 and RTS 2 aims, among other things, to provide further clarity on non-price forming transactions, which I understand is a high priority for the FIX Trading Community and will also help us clarify the dividing line between liquid trading and OTC trading,” noted Planta.