MiFID II Tradeweb Implementation Timeline: What, When, How
The impact of MiFID II will be extensive, and will affect everyone engaged in the dealing and the processing of financial instruments. With implementation less than a year away, market participants are accelerating their preparations to stay compliant in the new regulatory regime. As a long-standing operator of regulated electronic marketplaces, Tradeweb is ideally placed to help its clients get ready to navigate the changing trading landscape.
Last month, we launched a series of MiFID II-focused webinars providing insight on key regulatory technical points and implementation, as well as their impact on market structure and daily workflows. Our inaugural session covered the practical aspects emerging around the new rules, including Tradeweb’s technical roadmap and implementation timeline.
Regulatory status
MiFID II and MiFIR represent significant changes for key aspects of fixed income and OTC derivatives markets in Europe, including the introduction of the OTF (Organised Trading Facility) category. However, MTFs (Multilateral Trading Facilities) have existed since MiFID I for all financial instruments.
Tradeweb has operated an MTF since 2007. In fact, we have been regulated by the UK’s FCA since we launched our European business in 2000. This differentiates us from a number of other platforms that have been or will be applying for regulated venue status and must, therefore, put in place new arrangements with their users.
RFQ protocol changes
When ESMA was drafting its pre-trade transparency RTS, there were concerns that a proposal to publish RFQ responses as and when received would create a disincentive to quote and increase execution risk. After extensive engagement with regulators, clients and other platforms, our collection window concept was incorporated in the final RTS. Under this concept, RFQ responses become executable and are made public only after the collection window is ended by the requester.
While the final rules do not significantly alter the way the RFQ trading protocol currently operates, the main change pertains to the publication of pre- and post-trade transparency information. For fixed income and derivatives instruments, the exact information and timing will depend on the liquidity status of each security and the size of the trade – with the SSTI and LIS levels being different for pre-trade and post-trade transparency.
To help firms understand the transparency regime that will apply to their RFQs and trades, we will be adding to the ticket both liquidity status, and SSTI and LIS size threshold information for all instruments in scope. We will also be adding information about whether a derivative is subject to the EMIR clearing obligation and MiFIR trading obligation.
Reporting services
Best execution remains a key area of focus for regulators and market participants alike. MiFID II and MiFIR will result in a far greater range of data sources. With this in mind, we’ll be expanding our TCA tool not only to incorporate these new data sources, but also to add pre-trade analysis to the existing post-trade focused offering.
As an execution venue, we will also be publishing quarterly execution quality reports under RTS 27, and making these available on our website. In addition, we will be offering tailored MIS (Management Information Systems) via the same tools to aid firms with their own annual RTS 28 report.
As well as our on-venue services, we are continuing to expand our off-venue solutions. We’re planning to operate an APA (Approved Publication Arrangement) for firms to make public their off-venue trades. Three leading sell-side firms - Deutsche Bank, Goldman Sachs and JP Morgan - have already selected our APA for the provision of post-trade reporting services. As well as fulfilling the reporting obligation, our APA will include a comprehensive rules engine to determine who is responsible for reporting and whether the trade qualifies for a deferred publication.
To complement our real-time reporting service, we will also be providing an SI quote facility and are looking at workflow solutions to help firms with data capture and record keeping for off-venue or voice trades.
Clock synchronisation
MiFID II introduces a requirement for trading venues and their members or participants to sync their business clocks to UTC. The requirements are specified in RTS 25, and differ for trading venues and their members or participants.
Venues like Tradeweb are required to sync their business clocks to UTC to 1 millisecond level of granularity. They must also establish a system of traceability to UTC, from which they can only diverge by 1 millisecond.
For members or participants of trading venues, the required level of granularity and maximum divergence depend on the type of trading activity. For more manual types of trading carried out by a participant, the RTS specify that business clocks should be synched to 1 second level of granularity, including both RFQ that involves human intervention and voice trading.
Meanwhile, algorithmic trading must be synched to a greater granularity: algo trading in general to 1 millisecond and high frequency trading to 100 microseconds.
The key question for participants is what type of trading activity they are undertaking – is it manual or is the participant using algorithmic trading? If trading on an RFQ system, the requirement is 1 second as this involves human intervention and is, therefore, considered to be manual. This would mean that the requirements on- and off-venue are aligned, with both having to be at 1 second level of granularity.
Straight-Through-Processing
MiFIR introduces new STP requirements for cleared derivatives, including:
1. A pre-trade clearing certainty check
2. Timeframes for submitting trades to clearing houses, and
3. Rules around re-submission and voidance in the event of clearing rejects
Although the rules themselves are very similar to the CFTC’s SEF rules, their scope is broader and will include both derivatives mandated to clear under EMIR, but also any other derivative contract that is voluntarily cleared on a trading venue.
We have already incorporated voluntary pre-trade clearing certainty checks on our MTF ticket, but will be switching these to mandatory and extending this from EMIR products only to other derivatives that are voluntarily cleared.
As with our SEF, we support both a push and ping model, so a firm’s clearing member can either upload the credit limits to our platform or use a credit hub. Similarly, we provide both direct links to clearing houses and links to middleware providers, in our bid to offer clients as much flexibility as possible.
Countdown to 2018
The FCA has made it clear that all firms are expected to comply with the new rules from 3rd January 2018. It’s expected that more business will be executed electronically on-venue, not just because of the simpler reporting regime, but also because this creates an electronic audit trail that can assist with record keeping and regulatory reporting.
At Tradeweb, we’re already well underway with our implementation plans. Our key principle has been right from the start to limit changes for buy-side participants and to minimise any technical implementation costs.
As a pan-European business, we are also keeping a close watch on the Brexit developments, constantly engaging with policy makers and other market participants to ensure that we continue to provide services to our users across Europe.