Dion Travagliante, Head of North America at Hoptroff, outlines the importance of MiFID II compliance in ensuring UK firms remain internationally recognised.
Announced on Christmas Eve, the Trade and Cooperation Agreement – better known as the ‘Brexit Deal’ – leaves lots of question marks for those in financial services. Before anything else can be decided, the EU must first accept that Britain’s financial regulations are “equivalent” to those in the European Union: the Markets in Financial Instruments Directive (MiFID II).
Since its implementation in January 2018, MiFID II has transformed financial services with policies that promote transparency and trust across processes within the industry. As Britain navigates a new economic arena, many are hoping to avoid further instability by conforming to the existing internationally respected regulations.
The MiFID regulations were implemented after the global financial crash of 2008 for a very simple reason: to prevent another crisis. The rules cover areas of financial practice that most people have never even considered. This means that British businesses are currently following an extremely clear and thorough guidebook that protects them from financial damage.
The rules on time synchronisation are one notable example of this. Accurate time is at the heart of electronic trading – but all clocks naturally drift. It might not matter if the time on your phone is a few seconds out, but it does matter if the time is wrong on a busy server that transfers thousands of pieces of data every second of the day. If your server’s clock is wrong, data logs can become confused, transactions may be cancelled, and you will be vulnerable in the event of a dispute.
Accurate time is at the heart of electronic trading.
This is where MiFID II comes in. Article 50 restricts every server that is an active market participant to a maximum divergence of between 100 microseconds and 1 millisecond (depending on the type of trading) from the benchmark of UTC (Universal Time).
MiFID II is vital in protecting the best interests of British businesses, but the importance of the regulations go even further. As British financial services look to recover from the shock of the COVID-19 pandemic, Britain must do everything it can to stabilise its position in the global economy.
Amending MiFID II is a threat to this stability, as international trust in a country’s financial market is dependent on the extent of its regulations. This was made evident last February when the pound dropped sharply against the US dollar following suggestions of a MiFID “shake up” by the ESMA.
In the past, some groups have been resistant to upholding financial regulations because it has been expensive to do so. To get precision timing, companies had to install and maintain a satellite receiver at every active trading venue, secure access to a grandmaster clock, and spend resources on monitoring and verifying their data logs.
Recent technological developments have made this reluctance redundant. Smarter solutions have entered the market that make carrying out the best financial practice a lot easier and more cost-effective. Traceable Time as a Service (TTaaS) is the premier network-delivered solution for time synchronisation. The software product synchronises your clocks and monitors data for you; no hardware or maintenance is required.
Financial firms across Britain have spent the past three years implementing processes that adhere to MiFID II. Instead of “shaking up” the rules once again, consistency is needed as the industry moves forward.
Ever since its inception, MiFID II has played an essential role in rebuilding trust in the financial markets. Regulations like those placed on time synchronisation ensure that these markets are both reliable and protected and they have never been more easy or cost-effective to implement. This trust is something that Britain should not take for granted as the world enters an extremely turbulent economic period.
Modern automation and computer systems, particularly in sensitive national industries like financial services, need accurate time to function efficiently and they depend heavily on satellite systems to provide it. Simon Kenny, CEO of Hoptroff, shares his insight on the importance of time as part of modern financial infrastructure.
Satellite Navigation Systems are today’s under-acknowledged global good. Knowing where you are appears to be yesterday’s problem; whip your phone out, and you can establish where you are and find where you need to go very easily using the GPS. However, the UK does not own or control a satellite timing and location system, we rely on the systems built by others, such as the USA, Russia, and the EU, to give us time and location.
We rely on them for our vital financial services industry to accurately execute transactions. If those systems were to be suddenly unavailable either because of accident, deliberate spoofing/jamming or because the provision policy of the owners were to change, then time accuracy would be heavily disrupted in the UK and so would the performance of automated systems that need accurate time to function. Financial services rely on stable time feeds to verify thousands of transactions a second and most of those time feeds are satellite derived, so in the absence of our own UK owned and operated system, we cannot take the risk of it suddenly being unavailable. This is why the UK Government is investing in the National Timing Centre, which will develop a system for distributing time across the UK that is independent of GPS and which would enable the tracking of transactions to continue should the satellite connections be lost.
A pound of butter is a pound of butter; it is part of a measurement of weight that it should not change suddenly. It is fixed, but time is cumulative, it is part of its nature that it should change. So, to know what the time is, you care about the total number of seconds that have elapsed and as even tiny errors happen, they quickly become noticeable and clocks begin to disagree. To correct this disagreement the only option is to reach a consensus between national standards bodies about what the time is and then share it freely. This consensus is UTC (Universal Time), the standard to which everybody regulates their clocks.
Financial services rely on stable time feeds to verify thousands of transactions a second and most of those time feeds are satellite derived, so in the absence of our own UK owned and operated system, we cannot take the risk of it suddenly being unavailable.
The importance of highly accurate and synchronised time across different points in a distributed process was made clear at the end of last year when the Bank of England discovered early access to Bank announcements was being sold as a service. An audio feed, set up to provide a resilient back up to the video stream, was received eight seconds earlier at key co-locations than the video. Eight seconds providing a clear window in which to arbitrage any market sensitive announcement by the bank.
To effectively release sensitive market information, it is necessary not just to release the information at the same time to everyone, but to also manage the delivery of that information vis different media so that it arrives simultaneously at sensitive market venues or Co-Locations. When early access to data can be leveraged into a trading advantage, accurate synchronization of devices is required to correct the distortion and allow markets to operate transparently.
The science of real time data can only be coherent if that time consensus can be distributed ubiquitously at low cost, and at greater accuracy than the speed with which machines make decisions and take actions. If the accuracy is not good enough, or access to reference source is lost altogether, then systems will be disrupted and records of what a machine has done will be unreliable. That sweet spot is around twenty microseconds today: the time is accurate enough to measure and monitor server activity, but it can be delivered through software and existing connectivity without the need for expensive timing infrastructure to be installed. If synchronized time is to become ubiquitous, then it needs to be cost effective and easy to manage.
Software timestamping is a great solution to help financial institutions comply with MiFID II and CAT timestamping requirements not only because it is very cost effective, but because it can accept a time feed from different sources; a satellite or via a network cable feed, if the satellite becomes unavailable. It has been tested and verified that existing telecoms networks can distribute accurate time to any major data centre reliably and at scale. It is not necessary to have satellite antennae at each data centre location to connect to GPS. Resilient network connections, plus a local “Armageddon clock”, which can take over timing in the event of an interruption in connectivity, are less expensive and easier to maintain. The National Timing Centre will serve to expand the availability of a UTC time signal via multiple fibre networks, so the UK finance industry will have a cost-effective and resilient alternative to satellite available for all financial services companies.
If all the devices in a distributed process don’t share the same time to sufficient accuracy, then the records they produce will put events in the wrong sequence and with incorrect intervals. However, if the UK finance industry had cheap, ubiquitous, accurate time coming from a reference source, then UK market participants would be able to enjoy the benefits of a unique “Time Fabric” where all timestamps, in any application, would be verified and capable of acting as reference data in any analysis. Time intervals could be used to authenticate proper execution and identify early when a process is not performing as intended. A national timing infrastructure offers the potential to improve the quality and utility of market data not just in financial services, but in any industry using automated systems that chooses to adopt it.