The TRADE’s Crystal Ball 2021: Regulation

Gaze into The TRADE's crystal ball for insights from market participants on their regulation and market structure predictions for the year ahead.

As we move into the post-Brexit era, London is poised to lose its status as the home of MTFs, with the bulk of trading in EU shares set to move to the continent. However, in the months ahead, we could see the UK take the opportunity to rewrite trading rules and craft a more liberal approach to market structure that diverges from the EU’s fixation on increasing lit trading. 

As a result, the UK could relax dark-pool restrictions and decline to follow the EU’s lead on other MiFID II reforms surrounding periodic auctions and systematic internalisers. That could affect broader regulatory equivalence discussions but could eventually make the UK the preferred trading destination for non-European firms. Meanwhile, there is set to be more discussion on how the industry handles exchange outages, especially as remote working becomes more commonplace across the industry. 
Anish Puaar, market structure analyst, Rosenblatt Securities

 For London’s financial markets the macro environment will be dominated by pulling out of the economic COVID-19 nosedive and the early phases of the post-Brexit era. UK financial markets have been an afterthought in Brexit negotiations and the impact on the City will start to become clearer as financial firms execute their Brexit strategies. This will not happen on a ‘big bang’ basis but over time as firms activate or upgrade their offices in EU countries.

The most conspicuous effect will be in the number of businesses transferred from the City, as well as the capital and liquidity required to finance them rather than in the number of staff employed. Equivalence negotiations may take years as different parts of overly complex regulation will have to be assessed separately. Changes in the US and elsewhere will mean that there will be efforts to align regulation more effectively between financial centres and stimulate a ‘globalisation’ approach to prudential and conduct frameworks.
– David Clark, chairman, European Venues and Intermediaries Association (EVIA)

 Regulators have done a good job in supporting the buy-side during 2020 through the introduction of a number of measures, from the easing of restrictions to postponing regulation, giving the industry vital time to alleviate the operational burden accompanying the switch to largescale remote working. 2021 will see firms playing catch-up as regulation can’t be postponed indefinitely. The UK’s FCA has stated that it expects firms to continue to adhere to regulatory standards moving forward, irrespective of the ongoing operational disruption caused by COVID-19.

2020 has also witnessed a significant change in the dynamic of the relationship between the regulator and those regulated, which should remain for the foreseeable future. Both parties are now on a more equal footing as they collaborate closely on the best response for the buy-side. Heading into 2021, we also expect to see an even greater emphasis placed upon the regulation of data as firms find themselves in possession of ever more data with the accelerated trend of digital adoption.
– Alexandra Foster, director, insurance, wealth management and financial services, BT

The continued rate of change for regulatory reporting shows no sign of slowing down and therefore the cost of compliance continues to increase. Not only for implementing new regimes, but for maintaining existing reporting obligations and adapting to change.

With the pandemic and market volatility adding to operational cost and risk, market participants will accelerate plans to revaluate the reporting landscape, realising that in-house solutions provide no competitive advantage.

Instead, compliance teams will outsource legacy reporting solutions to cloud-based vendors, whose technology is able to address large volumes of complex data across multiple regulations and asset classes, allowing firms to control costs and have a more strategic approach to regulatory reporting.
– Philip Flood, CCO Inforlago, a Gresham Technologies company

2021 will continue to see asset managers evaluate their business infrastructure to ensure that trading intentions are not undermined by poor execution outcomes as a result of inadequate technology. This last year has been a steep learning curve for investment managers as they had to review their BCP plans, actively evaluate outsourcing some of their dealing desk functionality or insource additional dealing desk support from third party providers.

In the quest to reduce costs, but to also focus on producing returns for the end investors, the industry will continue to look to independent, broker-neutral dealing desk tools, taking a data driven approach to everything from analytics, to trading and routing technology. That is the only way investment managers can effectively implement trading strategies, using additional channels to deal with unprecedented situations, automating vanilla trades and leaving traders free to focus on more complex value-add client service.
– Dan Shepherd, CEO, BTON Financial

2020 was a year that forced market participants across the spectrum to adapt and react. While this demonstrated yet again the strength of the global markets, I suspect we’ll ultimately look back and see it as a catalyst event given the time, effort and resource firms invested in their futures.

For example, the buy-side further built out the infrastructures needed to access additional liquidity and lower transaction costs. Meanwhile, issuers continued to grow their product distribution channels despite heightened volatility and continued liquidity fragmentation. We expect 2021 will see these trends continue, especially as alternative sources of electronic liquidity across credit, derivatives and equities come online and cause market participants to take a fresh look at their approach to managing risk.
– Bryan Christian, head of institutional services, Old Mission

To say 2020 was tumultuous is obviously a huge understatement. The market volatility, combined with the temporary exchange floor closures, drove clients to adopt new workflows and change behaviour quickly.

We think one long-term effect of these changes – as well as the implementation of regulatory initiatives like CAT and the OCC’s new ‘actionable identifier’ tags – is the further prioritisation that both the buy- and sell-side will place on the streamlining of trading workflows, and not just around execution. From origination through execution, risk, post-trade analysis, clearing and compliance reporting – the pace of innovation around all of it has been accelerated. And as those efficiencies take hold in 2021 and beyond, additional transparency and further focus on systemic risk reduction will become even more of a priority.
– Tim Miller, co-COO, Dash

Proprietary trading firms using low latency strategies will continue to engage with emerging and frontier market(s), driven by the desire to diversify as well as arbitrage opportunities. The COVID-19 crisis means even more of these traders are interested in trading on new exchanges. Preferred markets will be China, India and Brazil. For providers like Avelacom, we can differentiate ourselves by further expanding our network capacity and geographical presence in these markets as well as diversify our portfolio of solutions including providing more options for market data products.
– Aleksey Larichev, CEO, Avelacom

Today, buy-side firms have to grapple with the most complex trading environment in the sector’s history, mainly due to heightened volatility, increasing regulatory obligations and the need to follow, understand and trade a diverse range of asset classes on behalf of clients. In addition to this, the industry now has access to a huge amount of news sources and intelligence which need to be condensed and interpreted in order to make informed decisions on behalf of clients. All of this comes at a time when the industry is under mounting fee pressure while trying to ensure their own operations remain resilient during a downturn.

As a result, 2021 will bring further evolution to the role and expertise required of a buy-side trader. More than ever, they must have capabilities across asset classes; an ability to build and maintain strong client relationships; strong regulatory understanding; tech savviness and an ability to effectively use the latest trading systems. On top of that, they cannot afford to operate in isolation – trading desks need to work closely with the middle and back office functions to make sure revenues generated on the front desk are not wiped out by operational inefficiencies.
– Michael Horan, head of trading, BNY Mellon Pershing