GreySpark Case Study - Regulatory Assurance, MiFID II
Electronic Trading and Governance Risk Management
Introduced in 2018, the Markets in Financial Instruments Directive II (MiFID II), seeks to improve investor protections, transparency, fair competition and market stability in financial markets across the EU.
MiFID II replaced the original MiFID I framework, which was introduced in 2007 before the onset of the global financial crisis of 2008. One of the key focus areas for MiFID II is electronic trading, and more specifically, algorithmic trading.
In the main, in-scope firms are expected to have in place effective systems and risk controls to ensure trading systems are resilient and have enough capacity, are subject to appropriate thresholds and limits that prevent sending erroneous orders, do not function in a way that contributes to a disorderly market, and cannot be used for any purpose that is contrary to the rules of a trading venue to which it is connected.
In order to maintain regulatory alignment, UK financial regulator, the Financial Conduct Authority (FCA), responded by publishing a report describing algorithmic trading risk management best practices, with another UK regulator, the Prudential Regulatory Authority (PRA), independently launching a consultation on its expectations around risk management and governance in algorithmic trading.
As a result of the extensive regulatory changes and coverage, a client commissioned GreySpark Partners to fulfill the deliverable to the regulator. Specifically, GreySpark deployed a specialist consultant in the Electronic Trading and Risk Management space, to highlight gaps identified in the FCA and PRA SS5/18 requirements, ahead of performing remedial work to meet regulatory standards.
The consultant conducted the following:
Created and maintained inventories of controls in the e-trading space;
Implemented robust governance and controls in the Electronic Trading space;
Supported the Automated Trading Control function with operational task, and;
Liaised with Regulatory teams, Technology, Conduct Advisory and Legal understanding market and regulatory changes.
As a result, the consultant produced the following deliverables;
Algorithm Governance and Risk Management Framework Document;
Revamped PRA compatible Algorithm Inventory, and;
Modified Algorithm Approval Checklist.
The client benefitted on several fronts. Specifically, they were able to achieve the necessary regulatory changes before the deadline. In addition, the client was able to plan and undertake remediation activities following communication with stakeholders, and understand governance and oversight of their electronic trading processes through a documented format.
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