Market participants are naturally worried about the immediate costs of regulation, some of them still uncertain about the future benefits. But with all the twists and turns on the road to regulatory change, meeting the requirements imposed by regulators is no easy task.
Whatever the legislation, the politicians agree on the broad principles and set a go-live date and then the clock starts ticking to agree the finer details and deliver the software. But the approach that has typically been taken to regulatory change is flawed in many ways. While this is a general issue, it can be perfectly illustrated by MiFID II. As is so often the case, the political agreement hides some unresolved issues. Even three years after publishing the MiFID II Level 1 text, there is no certainty around what Direct Electronic Access means. Also, those Level 1 texts are a poor indicator of where the complexity really lies. For example, MiFID II Articles 57 & 58 appear straightforward enough, but have in fact triggered two of the most controversial and delayed technical standards (RTS 22 and 23). In spite of the one year extension of the original MiFID II implementation deadline, we’re still missing many of the details with less than 200 days until go-live. And just last week the European Commission re-opened a Level 2 text to change the rules around the Systematic Internaliser. As a consequence, any delivery schedule soon comes under serious pressure and IT teams are expected to start building systems while there is no market-wide agreement. This is like two heart surgeons discussing what to do after they’ve cut the patient open.
All of this translates into higher costs and greater complexity for the industry. While some initiatives look at streamlining regulation (for example, the CFTC’s Project KISS), we should also think about how to implement regulatory change itself in a more efficient and cost-effective way. So how about a regulatory change freeze – a fixed period where regulators don’t move the goal posts and firms can work toward a fully-defined set of detailed requirements for their IT departments. Too late for MiFID II, I know, but this approach will ultimately enable technology to deliver solutions faster and cheaper to the benefit of the industry and its regulators alike.