Last month, EY’s head of regulatory reform for asset management and capital markets hit the headlines when he told the industry to expect up to 40 new algorithms on the market for trading fixed income and FX.
His timescale for this flurry of new launches was before the Markets in Financial Instruments Directive II (MiFID II) takes effect in 2017.
In an interview with The Trade, Anthony Kirby, head of regulatory reform for asset management and capital markets at EY said corporate, emerging market and high yield debt together with credit default swaps and equity derivatives would be a focus for some of the new algorithms to hit the market.
One of the reasons that Kirby’s words were considered so profound was his background. Prior to taking up his current role at the consultancy formerly known as Ernst & Young, Kirby worked at Instinet, CME Group and Merrill Lynch Investment Management.
His position at EY means he is able to gain an overview of market concerns from the requests he handles for clients. In the interview with The Trade, he laid out his client’s four top concerns for the coming months ahead.
Miffed at MIFID
Unsurprisingly, MIFID II remains at the top of the list for Kirby’s clients, particularly issues arising from the changes in approach to Know Your Client (KYC) and indication of interest proposals.
He explains: “There is a lot more attention on KYC, the indication of interest, cross boarder types, separation of low touch and high touch, dark pools and the double volume cap.
“How do you provide the evidence of all of that activity? In addition, there are more fields to be incorporated from client reporting and trade reporting from the desk. In MiFID I, you had to do it for equities but for MiFID II, you have to do it for non-equities too.”
Under MiFID II, trade reporting is far more detailed than required under the current regime. As a result, Kirby has spent most of his time underscoring to clients the ‘personal’ nature of detail that is now expected.
He says: “It is not tick box compliance. This time it is personal. You are not just saying the firm did such-a-thing at such-a-time. [The regulators] want to know who touched the trade and all the steps that lead to the execution, including the investment decision.
The person who makes that investment decision has to be recorded. The person who receives an indication of interest has to be captured, the person who finished the execution has to be captured. You are going to need to record Trader ID. The ID that you need to record will vary depending on country to country.”
This time it is personal.”
Forensic investment
Kirby says the requirements for firms to keep records of increasingly specific details of each trade will mean that companies will need to invest in forensic technology to assist them.
To do this, they are investing in order management systems and digitisation techniques which catalogue datasets in new ways.
He says: “Someone has become very prescriptive about recording algo and order IDs. There are so many different primary, secondary and tertiary that it is going to be quite different to classify these.
“The biggest number I have heard is a 100. My son used to work for an algo directory. I don’t know how regulators are going to classify these, as every [algo provider] is looking to differentiate, not copy…”