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A Q&A with the man who knows about the coming regulatory changes in Europe, and says traders won’t know what’s hit them

Bob Fuller

We spoke to Bob Fuller, director of Fixnetix, CEO of Exchange Axis and former CEO of equiduct and head of IT at Dresdner Kleinwort.

As a specialist in a specialist in MifID-compliant trading systems, Bob knows more than possibly anyone else about the regulatory-driven changes that are coming soon to the City of London. We asked him to look into the future. This is what he saw.

Q: Do you think traders in London are aware of the enormity of the changes that will hit them under MiFID II and MiFIR?

Unfortunately not.

It seems to me that market instability is causing people to concentrate on short term problems rather than the large regulatory changes that are contained in MiFID II and MiFIR as well as EMiR and MAD.

People appear complacent as the original MiFID changes were relatively easy to deal with. As an example most banks only had to issue new documents to customers to cover one of the major changes. However, the proposed changes under MiFID II and MiFIR are much more fundamental and will probably change trading and settlement workflows substantially.

Q: So, what will the biggest change be?

Put very simply, the biggest consequence of the regulations is likely to be that voice trading is going to reduce significantly and trading will become a lot more electronic.  A change like this would mean that jobs are going to disappear from trading rooms and jobs created for technologists/IT. That’s a pretty big change.

Fundamentally, the new regulation following from the G20 accord is moving OTC derivatives and other standard instruments, where possible, to be centrally cleared.  Right now, if you’re a trader in one of these instruments they are not usually cleared and any contract differences are dealt with bygetting someone in the back office to deal with it. In the new proposed workflow, you’ll need to send all the details of the trade to a central clearer in real-time so they can match them with the counterparty.  If they don’t match then it can’t be novated and therefore can’t be cleared and settled.

Q: Which products will be affected?

At the moment, this is still to be decided. ESMA, the independent EU financial services regulator, is investigating which products can be centrally cleared at the moment, and is expected to report back by the end of the summer. Some simple products, like interest rate swaps, standard CDS, and securitised bonds are almost certain to have to be cleared.

Q: And this will lead to job losses?

Almost certainly it will lead to a different mix of people being needed and will probably increase the amount of outsourcing as this amount of change over such a short period always does. In the past, whenever a market has started to become electronic, the amount of flow that goes through voice brokers diminishes dramatically. In my opinion, once electronic trading begins in these products, it will take hold very fast.

Q: And you think people are unaware of the enormity of the changes?

Yes, people cant believe that this amount of change can happen!  Some of these changes are supposed to start happening in 2013 and to be fully implemented by 2014. I call it the John McEnroe effect – there’s an attitude of, “You can’t be serious!”

Q: Any other things people ought to be aware of…?

Yes. There is currently a lot of dscussion on wheteher banker crossing networks will continue to be allowed. In the new world, it may not be possible to mix proprietary and customer orsders on anything other than an exchange or MTF.

Q: Will anyone benefit?

I am not sure the banking community as a whole will, but if we have to find a ‘winner’ then it will probably be IT professionals and project managers. These changes to workflows will likely lead to significant IT system changes and therefore this will lead to more need for IT proffesionals and outsourcing. If all of the changes being proposed go through this is going to be a very big change.

Q: Are you sure you’re not overreacting?

I don’t believe I am overreacting, MiFID II and MiFIR were written in draft form for reading last Christmas. MEPs have drafted a set of changes, over 1200,  which are due to be voted on July 10th, most of which tighten rather than loosen the draft legislation. A new version will be voted on in the European Parliament in September and is likely to be passed by December, with an implementation date of early 2014.

The changes being proposed will involve spending a lot of money and potentially the financial institutions making less money at the end. Obviously people find this a difficult situation to take on board.

Q: So, what’s the difference between MiFID II and MiFIR?

They’re two sides of the same coin, MiFIR is regulation: it means that as soon as the European Parliament passes it, it will become law in all EU countries. MiFID II is a directive, which means that individual countries will need to enact it in their law books. MiFID can be adapted in local implementation; MiFIR can’t.

Bob Fuller will be speaking a knowledge forum event organised by search firm Pedersen and Partners on July 18th. If you would like to be considered for attendance, please email James.Gardner@pedersenandpartners.com.

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