James Rundle: The Third Time’s the Charm

“The other day, I heard the words ‘Mifid III’ and ‘inevitable’ in the same sentence,” said one regulator at an industry conference last month. The audience, comprising mostly compliance officers, responded with a mix of nervous laughter and stony silence. And that’s not the only place I’ve heard similar sentiments. Articles in mainstream newspapers predict another round of European macro-regulation before the second round has even been properly ratified, addressing the inevitable holes that it will have.

New rules are coming thick and fast, with 2013 being called the year when regulation stops being a concept and starts being a reality. It sounds great as a sound bite, but the reality is more complicated. Take the constantly moving goalposts of over-the-counter (OTC) derivatives reform in the US, for instance, the back-and-forth over the European Markets Infrastructure Regulation (EMIR), a fragmented settlement cycle and the ongoing discussion about just what should be done about high-frequency trading (HFT). Quite how this will be the year where it all crystallizes and becomes a new market, regulated away from systemic risk and into a fairer landscape, isn’t readily apparent to me.

No Problems Here
All of this creates issues for those market participants dealing regularly with technology, of course. Perhaps not so much for the traders at the coal face—one I spoke to recently at a large French bank, who specializes in interest-rate swaps, related the bank’s story of compliance through getting its vendors to adjust systems rapidly to meet deadlines—but for the people tasked with developing systems, it can seem like an impossible task. Just ask the swap execution facilities (SEFs). Sure, on the surface, they’re happy to say that they’ve taken great legal counsel and they have a fair idea of what the final form of the regulations will be—they’re just waiting for finalization, so no problems here. But dig a little further, and you’re bound to run into complaints about having to over-develop platforms to meet any permutation of the eventual rules, just to be ready for when the arbitrary compliance date is set.

Take this across the broad spectrum of market activity, and the level of engineering, re-engineering, development, re-development, testing and rollout becomes stark indeed. It’s not helped when the politic rather than the pragmatic is the one making the rules. For example, the European Securities and Markets Authority (ESMA) is good at releasing its technical standards for areas such as algorithmic trading, even though it’s not the body that actually writes the policy. That’s down to the European Commission and, eventually, Parliament, which, like a windsock, changes its membership according to the direction of the political wind in its constituent states, all of which could mean a radical reversal in a few years’ time.

Systemic Risk
But it’s hard to argue that regulation is not needed—it’s annoying, but necessary. The key with oversight, though, is that it’s meant to prevent the introduction of systemic risk and to make markets safer. But the number of regulatory overhauls in so many jurisdictions, with issues of overreach and conflict through extraterritoriality, is surely introducing elements of risk into the system.

While journalists and conference attendees may wax lyrical about the likelihood of Mifid III, it seems as if it’s an inherently bad idea until the current regulatory issues are ironed out once and for all. That means firmer timelines, harmonization between regions, deeper engagement, the removal of politics wherever possible, and a review of compliance periods, just as a start. Keeping up with the change on the technology front is hard when you can’t see the forest for the trees, especially when the forest keeps getting bigger.