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JWG regulatory trading digest

Published in Automated Trader Magazine Issue 35 Winter 2015

According to data compiled by the Wall Street Journal, Reuters and The Huffington Post, since 2009, tier one banks have paid at least $128 billion to regulators in the US and Europe. Here at JWG we decided to do our own research into these astronomical figures, and we discovered that this, in fact, only tells part of the story. When we factor in the associated costs connected with these fines, such as legal fees and losses made by firms from the forced sale of assets, the price tag for the industry increases substantially to total well over $260 billion globally in the 2009 to 2014 period

Although, when they're not dishing out fines,regulators still find plenty to keep them, and us, busy. Here's a look at some of their recent activity.


In September, the Financial Stability Board published their Fifth Implementation Progress Report of the G20 Data Gaps Initiative. The initiative was launched in the aftermath of the crisis to improve financial data globally, in order to, amongst other things, allow more effective assessment and intervention from regulators. Whilst the report is insistent that "significant progress has been made in implementing the DGI recommendations", it is also clear that there remains huge scope for improvement of datasets in the G20, and the extent to which these improvements are made could be crucial in regulators being able to spot the next crisis before it happens.


The Financial Stability Oversight Council (FSOC), established by the Dodd-Frank Act to respond to emerging threats to US financial stability, has been coming under fire from the US Government Accountability Office (GAO). The suggestion that "FSOC still lacks a comprehensive, systematic approach to identify emerging threats to financial stability" is a pretty damning one, given FSOC's remit, but they may well feel that they are being criticised for failing to achieve the impossible. Only time will tell if the GAO can be appeased and, indeed more pertinently, whether FSOC can actually "identify emerging threats to financial stability".

Meanwhile, the Securities and Exchange Commission (SEC) have announced a 'Pilot Plan to Assess Stock Market Tick Size Impact for Smaller Companies', in a move that has echoes of ESMA's proposals to set minimum tick sizes across exchanges in the EU under MiFID II. The SEC plan is, admittedly, less ambitious in scope, being aimed only at "certain stocks with smaller capitalization".


In the UK, banks will have submitted preliminary plans to the PRA for the new ring-fencing regime on 6 January. These new rules are part of the G20 plan to end "too big to fail". Meanwhile the FCA is pressing ahead with their review of best execution practices having stated that "most firms are not doing enough to deliver best execution". The FCA are attempting to front run MiFID II requirements in this area, by asking firms to rethink their policies earlier than the European Securities and Markets Authority (ESMA) will require.

However, perhaps the most significant recent regulatory development in the UK has gone rather under the radar. During the summer, the FCA and PRA jointly published 'Strengthening Accountability in Banking: a new regulatory framework for individuals'. The FCA and PRA are proposing some fundamental changes to regulatory accountability that are sure to be a cause for significant concern to senior managers in financial institutions struggling under the weight of ever mounting regulatory pressure. They are proposing a 'Senior Managers Regime' which will require firms to allocate a specific range of responsibilities to designated individuals - the headline being that these individuals canbe held accountable if their firm contravenes a requirement within their area of responsibility. And yes, by 'accountable', they do mean potentially criminally liable.

If the current state of trade reporting doesn't improve, then the first to be fitted up could well be senior managers responsible for the accuracy of such reports. In both the EU and the US, the data quality and collection problems that have been dogging OTC trade reporting continue to be major talking points.

In Europe, the industry as a whole has lobbied ESMA extensively for more guidance on trade reporting. Frustratingly for many, however, ESMA's responses continue to consist of simple referrals to the existing regulatory technical standards. To quote Fabrizio Planta, team leader for post-trading at ESMA, "We have already provided Q&As on how to implement the standards. They should simply be followed. It is up to the industry to come up with a standard". As part of an initiative to improve data quality from 1 December, trade repositories are be required to reject submissions where certain reportable fields have not been supplied.

European regulatory authorities left the industry with stacks of Christmas holiday reading that will continue to be digested well into the New Year. Perhaps the most significant part of this holiday reading was over 2000 pages worth on MiFID II published by ESMA. This included another Consultation Paper, Technical Advice to the European Commission, Draft Regulatory Technical Standards, and a Cost Benefit Analysis. The impact of these documents is sure to be a big theme in the first quarter of 2015.


The Investment Industry Regulatory Organization of Canada (IIROC) has become one of the latest national authorities to jump on the bandwagon and focus on tighter control of HFT, following in the footsteps of the EU and US as we discussed in last quarter's digest. IIROC has announced that it has tasked four academic teams to study the impact of HFT, the last of which was announced on 17 October and will focus on equity markets. The team will examine the "impact of

the dark liquidity rules" and "liquidity provision and market making by high frequency traders". Their work is expected to be published by June 2015.


The Japanese, not to be outdone by the Canadians, are also now indicating that they are ready to follow the US and EU and tackle HFT. In his keynote speech at the 2014 WFE General Assembly & Annual Meeting, Masamichi Kono of the Financial Services Agency of Japan, the banking, securities and exchange regulator, made a point of going after HFT. He said that HFT related "malfunctioning of trading and reporting systems have caused great concerns among participants and the general public" and went on to say that regulators must "be ready to intervene when needed, on a proactive and forward-looking basis". Watch this space.

So, in short, the regulators are definitely keeping us all busy...