Is MiFID II a Technology Tipping Point?

Greg Collins argues that, catalyzed by the wider strategic background, this latest round of regulation could take the trading floor to a tipping point in technology adoption.

New regulations are approaching: we’ve seen them before from the CFTC, the FSA (as was) and many others. Any regulation that is prescriptive in nature runs the risk of creating uncertainty when it is interpreted as a technology implementation. This time it’s MiFID II from the European Security Markets Authority [ESMA]. Everyone knew this was coming and roughly what it would entail but, with the gap between the issuing of technical standards and implementation being less than a year, how banks respond, especially at the technology level, remains to be seen. Financial regulation has been moving inexorably towards an end-state where compliance can be assessed and monitored in real time. As the requirements increase, so do the financial and legal punishments for any indiscretions and we see the business increasingly being held directly responsible for any non-compliance either conscious or accidental. Sadly, we still see inertia, especially with respect to trader voice, in many quarters as major institutions opt for retrospective eDiscovery to mitigate fines rather than implementing the phased investment we would recommend. Why is this?

Well, regulatory pressures only represent one facet of the strategic environment surrounding the trading floor.

International and Economic

Financial trading is a global, “follow the sun” industry with new trading hubs popping up on every continent. Despite these regional developments, economic uncertainty driven by a slowing Chinese economy and the resultant drop in commodity prices has seen market indices slide. Many well-known investment banks have seen 25-40% wiped from their 2015 year-end market caps as the sell-off continues.


Converged Communications has successfully evolved into Unified Communications across the modern enterprise but when it comes to Trader Voice the functionality is often delivered by proprietary systems, which are not directly compatible with the wider corporate communications infrastructure. There is an over-emphasis on hardware and a lack of open software standards. When considering compliance requirements such as trade reconstruction, the current use-case for voice on the trading floor needs to be revisited.

Social and Demographic

The current generation’s employees expect to interact flexibly using mobile devices as part of their professional lives. There is also a move across all demographics towards remote working, which can be empirically justified in terms of productivity, continuity and work-life balance. Despite the challenges, all these expectations can be met while delivering savings and resilience in a regulatory compliant communications environment.

Legal and Regulatory

As for MiFiD II itself? Well it’s a 446 page push towards transparency, safety, resilience and investor protection. A key take-out is the requirement to

“..record all communications that are intended to lead to a transaction.”

Longer retention times are demanded for recorded data and banks must monitor both the effectiveness of their recording programs as well as the content that they are capturing. In an apparent attempt to emphasize the pan-departmental nature of genuine compliance there is a directive that states that

“ must have clear oversight of recording processes.”

This is an essential step in the right direction; the processes, procedures and services that enable the underlying technology are just as important as the technology itself.

Expected Reaction

For years, at every opportunity, I have advised vendors and purchasers alike to align their trader voice paradigm to integrated software solutions that operate seamlessly with wider corporate infrastructure without the requirement for manual intervention. Doing so can allow banking CIOs to achieve a consistent strategy to facilitate genuine regulatory compliance by building it in rather than bolting it on. My company is staunchly unbiased so we will tell any vendor how we see them fitting into an optimized, future trader-voice landscape. Likewise, we can help any bank to achieve compliance to the new regulations based on the core technologies they choose to maintain or adopt.

The pressures of the economic environment will continue to see IT departments facing demands for intra-year ROI on projects, a requirement which is incompatible with long-term, strategic IT management. However, while the economic pressures initially present a barrier to progress it could be argued that they edge us closer to a tipping point. Vendors are starting to offer open standard, trader voice solutions but there still exists the need to substantially customize the environment to enable the level of self-service that creates true transparency. 

The largest organizations can afford to run major development and deployment operations and I see many variations in “roll your own” solutions. These will then firm up to be offered as more rigid, vendor provided services and eventually in a SaaS paradigm.  Whilst it is hoped that there is some proportionality to account for the limited budgets of smaller companies, some regulation will be mandatory across the board.

The Future

Whereas the economic pressures we see right now are sure to ease at some point the social, technological and regulatory trends will only gather more steam. Organizations who adopt integrated communications solutions now will find it easier to tag data for retrieval on-demand and to build in technologies such as voice analytics and phonetic indexing. As compliance becomes a real-time, business-as-usual activity, it will be possible to derive real value through business information that will aid in risk and strategic planning. ROI may not be intra year but with lower costs of ownership and fewer spikes in cost where retrieval is required, the returns will soon come. My hope is that the paradigm changes and that technology strategists will have the chance to practice innovative, effective solution development rather than doing the minimum to check only the required boxes.