Risk management has changed seismically over the course of the past year, and with it market participants’ software and technological requirements.
Last year, European firms and their counterparts around the world rushed to prepare for the second Markets in Financial Instruments Directive (Mifid II), as the European Securities and Markets Authority (Esma) pushed until the eleventh hour to formulate the rules. As market participants struggled to come to terms with their compliance and process responsibilities, many turned to the growing regtech market for solutions to Mifid II’s many burdens. Financial institutions large and small found that their own internal systems were lacking, and so spent much of the last few days of 2017 scrambling to get everything in place before launch day.
And the January 3 Mifid II go-live cliff edge of which much was made came and went, with financial services firms successfully working with innovative fintech providers – many of whom had been building flexible compliance, reporting and trade data systems capable of the directive’s most onerous requirements. But this year could see further change, and market participants digging deeper into the regtech arena: with Brexit negotiations ongoing, thoughts have turned to the impact on Mifid II, and if and how the UK will transition out of the rules. Elsewhere, Washington’s decision to roll back Dodd Frank could have a huge impact on the shape of the RMS market, with market monitoring and other tools gaining popularity over position and capital base analytic requirements.
And while many of the global regulatory requirements put in place in 2017 remain – and indeed look to increase in certain jurisdictions – risk managers may look to fintech markets for innovations that help them gain a competitive edge. That could be crucial, this year.
Recently political uncertainty in Europe has spread. The Italian government bond sell off in May filtered across the continent’s other financial markets. Effects were felt across the globe – as far as the US where government bond markets enjoyed a few days in the sun as investors searched for safe havens. Worryingly, billionaire George Soros outlined his concerns that another “major financial crisis” is just around the corner, at a speech with the European Council of Foreign Relations in late May. Should that happen, commentators and market participants will really be able to see just how successful Mifid II, and Dodd Frank – in whatever guise it finds itself in as the reformation process gathers steam – and how they’re able to protect the market.
For risk managers, all this means a greater requirement to understand the data they hold in the search for arbitrage. Instances of volatility have been few and far between so far this year, and so many have turned to the RMS market to find vendors capable of offering the best risk analytics.
Within RMS, many providers have made great steps in refining algorithmic trading functionalities, with artificial intelligence (AI) aiding risk metrics and providing customers with far more refined tools. Many vendors now provide real-time data analysis tools, allowing risk managers to quickly enter and exit positions in the growing intraday market.