The move follows the May announcement by US derivatives exchange CME Group that it would be winding down its regulatory reporting businesses at the end of 2020.

The announcement has meant rival providers have been scrambling to fill the top spot left by CME’s reporting businesses, NEX Regulatory Reporting and the Abide Financial division.

Cappitech’s cloud-based platform, which is used by more than 200 buy and sell-side firms, was the first platform to complete porting of CME trade reporting data in August following the exchange’s departure from the market.

The acquisition of the firm by IHS Markit will therefore offer it an edge in this newly competitive market and significantly expand its regulatory reporting offering to the financial industry.

“Regulatory reporting demands will continue to grow rapidly around the globe and customers are looking for a reliable, frictionless, and cost-effective way to comply with requirements across jurisdictions,” said Pierre Khemdoudi, managing director of global equities at IHS Markit.

However, IHS Markit is not the only firm that has stepped up to the plate in recent months hoping to claim the top spot.

Regulation technology firm SteelEye has also been bolstering its offering, on-boarding broker Capital Index as a client of its EMIR and MiFIR reporting services last week.

SteelEye was also hot on the trail of customers left searching for a replacement provider for CME Group last summer. Weeks after CME Group’s announcement it partnered with the London Stock Exchange Group’s (LSEG) regulatory reporting platform UnaVista to support firms in their migration away from NEX and Abide.

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As such, large firms are slowly starting to consider abandoning expensive, resource intensive in-house solutions in favour of vendor-led options that offer the benefits of ‘safety in numbers’ and ‘crowd wisdom’ in which the cumulative knowledge and experience of the vendor and its clients support accurate, regulator-approved and cost-effective reporting.
– Ronen Kertis, CEO, Cappitech

2021 will see big changes to the RegTech industry across four key areas. We expect more regulatory reporting vendors to struggle (as we saw with CME and Deutsche Bourse) on the back of the price war in the market – and for fees to increase for remaining providers. Regulators will clamp down on poor data quality and increase their focus on MAR, which has already begun at the FCA.

Surveillance will continue to evolve as people combine office and home working, with more focus on behavioural analytics and stringent policy enforcement. Finally, I expect the industry will move away from data silos, and instead adopt more efficient holistic solutions, where all data resides on a single platform which can be extensively used across compliance functions – for regulatory reporting, communications and trade surveillance.
– Matt Smith, CEO, SteelEye

There’s little doubt that institutional investor adoption of digital assets is heading toward a tipping point. 2021 could be a pivotal year for this asset class due to several developments. First, regulatory clarifications of practices around digital assets at the federal level and expansion of prime and other services that support institutional investments.

Then maturation of risk, execution and reporting tools required for professional investors and strong institutional client demand driving the embrace of digital assets by asset managers. Together, these factors will contribute to a more familiar investment environment for institutional investors, drastically driving adoption forward.
– Anton Katz, CEO, Talos

The most certain prediction is the continued requirement for efficiency. Market volatility, and thus profits, are low so the banks must do more with fewer people. The supervision and surveillance systems must give traders their time back so they can monetise the opportunities that arise when volatility returns. In addition, compliance and 1LOD (first line of defence) functions will increasingly focus on (and invest in) keeping pace with advances in technology – combining remote working with the emergence of new communication channels presents challenges for all firms trying to supervise employee behaviour.
– John Crouch CEO, Ideal Prediction

2021 is the year standardisation of the cryptoasset markets starts to occur, thereby fulfilling another pre-condition for the asset class to go mainstream.

ISO will launch its Digital Token Identifier (DTI) standard to uniquely identify every tradable cryptoasset in the same easy manner that equities, bonds and OTC derivatives are already identified in the traditional capital markets. This identification will enable efficient cryptoasset price discovery, sourcing of liquidity and identification of counterparties for trades.

Central banks and other public bodies will continue their exploration of the best ways to regulate the new financial asset class without throttling the breakneck innovations taking place with a necessary first step being to identify the standards the marketplace should adopt. We anticipate ISO standards such as the DTI will provide the glue that will coalesce the activities of such public bodies with the private sector initiatives taking place.
– Sassan Danesh, managing partner, Etrading Software

As mainstream recognition grows of Bitcoin’s utility as a store of value and custody solutions mature from both a technical and a legal clarity perspective, we expect to see a number of banks begin to offer custody and execution services to customers during 2021. We see a rapid increased adoption of institutional crypto trading and, due to the similarities in the markets between digital assets and FX, it will largely be the FX and precious metals trading teams that are involved. 

Adoption will be driven by institutional grade connectivity using robust technology to access multiple geographically distributed venues.  Fragmentation is a significant issue in both crypto and FX markets, and low latency multi-venue connectivity for market data and trading will increase access and transparency, as well as allow institutional teams to leverage their systems for trading FX to offer services to clients in this burgeoning asset class.
– Alexis Atkinson, founder, crypto and forex connectivity start-up, 4OTC

The year 2020 was transformative for the digital asset industry due to increased interest and involvement by both institutional players and regulatory bodies. Driving institutional adoption has been the regulatory clarity and guardrails established by the OCC and SEC and the availability of more institutional-grade platforms that provide the high levels of security and performance these firms require.

The creation of new cryptofinance products and the participation by prominent traditional financial institutions like Franklin Templeton and BNP Paribas, two of Curv’s newest clients, will motivate an increasing number of firms to enter the market in 2021.
– Itay Malinger, co-founder, CEO, Curv

2021 will be a year where artificial intelligence, machine learning and natural language processing further synthesises the relationship between fundamental investment research and trade execution for actively managed investments. We will see new and improved AI models deployed that will unlock the ability for active managers to draw new correlations across an investment organisation’s entire universe of qualitative research in order to identify new trading opportunities and emerging trends within portfolio holdings that would otherwise not be immediately visible on the surface.
– Hoony Youn, CTO, MackeyRMS

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According to Cappitech’s annual global regulatory reporting survey, which polled 89 market participants from banks, brokers, asset managers, hedge funds and corporates, revealed that 65% of firms overhauled their reporting in the last year.

The survey identified four key areas affecting firms’ ability to comply with regulatory reporting requirements, including new and changing regulations, CME’s decision to exit the regulatory reporting market, and the ongoing coronavirus pandemic.

“Existing regulatory reporting regimes could not be stopped due to the pandemic. Not only did firms see a significant increase in trading volumes, but coupled with working from home it created a challenging environment. Some relief was found by SFTR being delayed for three months and MAS delaying by a year new obligations,” Cappitech chief executive, Ronen Kertis, told The TRADE.

As well as the pandemic, in May this year, CME Group confirmed it would be shutting down its regulatory reporting businesses alongside its European and Australian trade repositories. The move meant that more than a thousand of CME’s clients have faced the task of transferring data and overhauling reporting processes as they switch vendors.

Similarly, German exchange group Deutsche Börse confirmed plans to offload its regulatory reporting hub. MarketAxess has since entered into an agreement to acquire the business from Deutsche Börse.  

In terms of efforts to improve transaction reporting processes, respondents in the Cappitech survey are targeting better data quality, reporting knowledge and expertise, prioritising reporting processes, and efficiency and enhancing completeness accuracy and timeliness of reporting, despite reduced budgets and the impact of the pandemic.

“All things considered, through hard work on the financial institutions’ side together with the service providers working closely with them, we think that the industry did a pretty good job in maintaining reporting at a high level of completeness, accurate and timely reporting,” Kertis added.

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The vendor-led porting conducted by Cappitech follows CME Group’s announcement in May that it would be exiting the market as a trade repository.

“The extraordinary high volumes of data mean that slots for this porting need to be booked in advance and can only be achieved over weekends when markets are closed. While the deadline is 20 November, these slots are closing and flexibility to fit porting in will become limited,” said Cappitech chief executive and founder Ronen Kertis.

“Vendors and TRs need to be fully engaged with clients to ensure this can be completed in time. Last weekend, our porting went smoothly with a great job performed by the REGIS-TR, CME and Cappitech staff and we have a clear plan for further porting the reminder of our clients during the upcoming weekends.”

The European Market Infrastructure Regulation (EMIR) requires a full history of open and closed positions to be ported in the case of a TR winding down. All CME-held open and closed trade data since 2014, when EMIR came into existence, will need to be ported.

Cappitech will allow clients reporting to be transferred to REGIS-TR or other trade repositories. Cappitech will also make any required amendments to the reporting to align it with TR requirements.

“I am delighted that Cappitech has chosen REGIS-TR to support its EMIR reporting solution. The successful porting of the first tranche of accounts from CME last weekend represents an important milestone and, in this regard, I very much look forward to the continued development of our long-term strategic partnership,” said chief executive of REGIS-TR Thomas Steimann.

In May earlier this year, CME Group confirmed it would be winding down its regulatory reporting businesses, alongside its European and Australian trade repositories.

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The move follows US derivatives exchange CME Group confirming it would be winding down its regulatory reporting businesses later this year, alongside its European and Australian trade repositories.

“In light of the CME regulatory reporting services in Asia ceasing operations imminently, providing MAS reporting will be particularly appealing for clients who now need to find a new service for MAS reporting in a limited time frame,” said Cappitech chief executive and founder Ronen Kertis.

“MAS reporting brings challenges that firms that haven’t been under scope in the past for the first phases of OTC reporting will soon find themselves having to report. Soon an additional wave of both investment and non-investment companies will be required to report equity, commodity, and FX OTC trades which will require the implementation of procedures to format submissions, create matched UTIs and filter out any non-scope trades. These can easily be managed via our platform and will enhance the accuracy of reporting as well as reduce the effort and the likelihood of manual errors for MAS reporting.”

Investors and derivatives holders that fall under the scope of the MAS regulation can now use Cappitech’s transaction reporting technology to transform data and submit it to DTCC’s Global Trade Repository (GTR) service.

Cappitech confirmed in a statement that its connection with DTCC’s GTR service and other TRs/ARMS would expand its existing compatibilities and provide a single interface for EMIR, SFTR, ASIC, US, and Canadian reporting.

MAS reporting regulations cover OTC derivatives trades for interest rate, credit, FX, equity, and commodity derivatives contracts. The regulation was expanded in October 2019; however, its final phase is set for 2021.

“As the leading trade repository in the world, GTR is uniquely positioned to help clients achieve compliance with the MAS October 2021 deadline,” added head of GTR Asia at DTCC Oliver Williams.

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At the same time, non-essential travel bans were enforced across the industry, exchanges were forced to shut trading floors and shift to electronic trading, short selling activities across Europe were massively curbed, and doomsday predictions of an impending global recession had already hit headlines. It has been dramatic, to say the least. 

It goes without saying that traders have been adapting to working and trading remotely in the current environment. As countries mandate employees work from home due to the COVID-19 pandemic, traders have set up remotely while trying to continue to perform their roles and duties as normal.

But the definition of normal has changed with trading floors closed, systems and technology tested and communication no longer occurring in-person. Early discussions with buy-side traders suggest that working from home is not ideal and more high-touch trading activity is taking place, as is often the case in times of market stress. 

“To be honest, working from home has been miserable. But in terms of the set up for remote trading, the process so far has been quite smooth. The technology is so good these days,” says a UK-based buy-side head of trading speaking to The TRADE on condition of anonymity. “We’ve seen more high-touch trading as traders seek certainty and security in having an extra pair of eyes. As traders gain more confidence in the remote setup, I expect that will revert back to low-touch.”

Massive change

A recent study from Refinitiv, which surveyed 400 of its FX trading clients globally, found that 80% of banks in Europe have opted to have staff split their working time between home and a separate office or backup site. Refinitiv explained that this highlights the ‘still somewhat dominant dependency of sell-side staff on trading desks and trading floors’ to ensure connectivity, compliance and efficiency of execution that is needed to perform their order-taking and execution roles. 

Business continuity plans may never have stretched as far to encompass a global remote working environment, along with subsequent market turbulence and a full technology carryover for employees. For teams used to information sharing in a live format, particularly in markets that do not trade electronically as much as others do, the remote working environment could hamper now dispersed desks.

“For those who work in a dealing room or a trading floor, working from home is a massive change,” says one European buy-side head of trading who spoke to The TRADE on condition of anonymity. “The use of a laptop PC is particularly challenging when you trade multi-asset order flow in a multi-platform environment. This challenge has been exacerbated by highly volatile markets. All our team is adapting and learning, and it is becoming more flexible under pressure, for example by using much more telephone than before or by improving and customising the order management system’s layout on smaller screens.”

A report from consultancy Aite Group, which outlined the challenges and opportunities caused by COVID-19 pandemic, depicted front-office or trading tasks as more challenging to perform at home, adding that a higher degree of trade breaks and compliance challenges are possible if functions are somehow excluded or reduced in coverage.

Matt Simon, author of the report at Aite Group, explains that for traditional asset management firms, workflow of idea creation to trade implementation is often the result of a group interactive effort. Front-office staff must have regular meetings with both internal investment professionals and external companies and trading counterparts to guarantee optimal results. 

Simon warns however, that replicating any of these tasks in a virtual-only environment reduces the number of interactions, and will most likely negatively influence human decisions that would be a part of the overall decision-making process. 

Some asset managers have been quick-off-the-mark in terms of planning to ensure that traders can continue working from home without disruption, which was carried out rather smoothly. As Simon alludes, communication is key to this process.  Matthew McLoughlin, head of trading at Liontrust Asset Management, says his trading desk has been able to operate as normal. Echoing the thoughts of the European buy-side trading head on the increasing importance of picking up the phone, McLoughlin adds that in the current environment, execution is now taking longer. 

“There has been more communication as I was very keen that we keep communication channels open and ensure there are no misunderstandings between teams or individuals,” McLoughlin tells The TRADE. “That being said, I have seen a large switch from phone to instant messaging across the market over the past few weeks, which has worked very well. Email traffic has increased too, but I have encouraged my team and others to pick up the phone if ever something needs clarifying as it just makes life easier and quicker.

“I have felt that despite everyone’s hard work, interactions on trades can take longer to happen, particularly on the more high-touch side of the business in both equities and credit. With people working from home, it just takes longer for a salesperson to speak to their trader and then feed that to a client on the other side and for all of that information to then eventually flow back to me. It hasn’t prevented us from doing business, and those partnerships that we enjoyed before are still there and still fruitful, but it just takes that little bit longer to do business on occasion.”

Increased costs 

Not only is execution taking longer, it is also more expensive. According to a study from the brokerage and analytics division at Virtu Financial, following a spike in volatility and wider spreads in March, trading costs as captured by its ‘Global Peer Universe’ spiked significantly, with every region seeing a large increase in the first quarter this year. 

Virtu found that US trading costs surged 42% in the first quarter compared to the quarter prior, with March costs increasing to a high of -63.7 bps. At the same time, trading costs in the UK surged 76% during the period, 55.2% in Europe – excluding the UK, and 78% in Asia Pacific – excluding Japan.

Ben Springett, head of European electronic and program trading at Jefferies, tells The TRADE that the shift to remote working combined with unprecedented levels of market volatility has driven a number of changes to the trading landscape, including in costs of trading. 

During the most volatile periods, data from Jefferies shows a rise in the cost of execution by more than three times, despite an explosion of liquidity. Spreads more than tripled while volatility more than quintupled, and liquidity at the touch was down by a third, suggesting a reduction in market maker activity. Springett categorises the challenges with remote working into being infrastructure-related, and the other behavioural. 

“Home working for traders was a rarity in the City prior to this, and as such, a huge amount of hardware was required to be sent to peoples’ houses to ensure they had remote access to trading capabilities and telephone,” Springett explains. 

“Once the physical capability is in place people need to adapt their working practices to ensure that they can be as effective in a geographically fragmented organisation. Person-to-person directed communication is straightforward, but a significant value of trading floors comes from being immersed in conversations going on around oneself. It is the benefit of information being gleaned from these, as well as the ability to contribute to them, that is much harder to re-create at home.”

As the Aite Group report highlights, when putting together business continuity plans, few asset managers and banks ever dreamed of the implications of portfolio management or trade and trade-support scenarios all having to be done from a home office. Simon adds that given the volume of orders, messaging and trading, firms are clearly more error prone and risk vulnerable. 

Echoing Springett’s concerns around the loss of vital information that could be used for investment and trading is John Ashworth, CEO of trading software provider Caplin. He explains that while this is less relevant due to the electronification of markets, the repercussions in the near-future could see the industry adopt a ‘new normal’ in remote working and trading. 

“In days gone by, when trading rooms were noisy places, there was a huge amount of subliminal information contained in background noise that individual traders would absorb to inform trading decisions,” Ashworth explains. 

“That effect is minimal nowadays since there’s so much electronic trading, but is still felt to some extent and will be missed amongst the very largest global banks and some super-regionals. My personal belief is that this enforced ‘new normal’ will lead to a dramatic change in the way managers manage, and how people view remote working.”

Complacency is not an option

But rules and regulations are still as important for traders working remotely as when they were in the office. UK market participants have been urged by regulators to continue capturing records and data as firms moved staff to alternative sites or working arrangements. Compliance technology provider Cappitech has warned on the risks and importance of maintaining regulatory obligations as traders are working from home.  

“Working from home has become the most common approach for firms to mitigate the spread of the virus in their offices,” Cappitech said. “Although working from home is an option, it does have its pitfalls. Most financial regulators include telephone and electronic messaging record requirements. As such, companies need to confirm that remote work options include methods to comply with existing regulatory standards… The reality is that even the most prepared firms will have gaps in their contingency plans. One way to spot regulatory functions that aren’t being completed or that will need to be fixed in the future are through control tools.”

Regulators have provided various temporary relief measures globally for reporting and auditing, but they have been clear that the environment should be established by the trader or support staff as a means of ignoring ethical practise and securities rules. EU authorities have delayed best execution reporting requirements in Europe, while uncleared margin rules (UMR) and the Securities Financing Transactions Regulation (SFTR) have all been postponed as firms focus on handling the new business environment. 

“Getting complacent is not an option. If you haven’t been monitoring and reporting on your activity you will be in trouble,” Matt Smith, CEO of compliance and data analytics provider SteelEye, tells The TRADE. 

“Regulatory reporting and crucially, market abuse monitoring, still needs to be done, especially during this time. In fact, financial crime is more likely during uncertain times and we are seeing some very strange behaviour and non-standard trading patterns in the market. To combat this, the regulators have been very clear about the fact that firms are still firmly ‘on the hook’.”

This in-depth feature was produced for the preview edition of the TRADETech Daily, which can be viewed in full here.

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The partnership will see Red Deer and Cappitech offer each other’s services to their respective client bases as an integrated service to help compliance teams manage regulations including MiFID II and MAR (Market Abuse Regulation). 

The services include Red Deer’s multi-asset trade and communications surveillance tool, which aims to help firms mitigate risk in their approach to managing surveillance with data and analytic, as well as Cappitech’s best execution monitoring, MiFID II transaction reporting and trade reconciliation platforms.

Ronen Kertis, CEO of Cappitech, commented that the deal with Red Deer will provide various benefits to the buy-side, who increasingly demand integrated regulatory services across multiple jurisdictions. 

“Our goal is to provide efficient, cost-effective solutions that also drive added value, and the addition of Red Deer’s Holistic Surveillance solution to our offering supports this,” Kertis added. “We are also looking forward to supporting Red Deer’s clients, as they look to integrate our regulatory reporting solutions into their existing services.”

A report from Cappitech in December found that a majority of 68% of firms have not received feedback from regulators on transaction reporting under MiFID II. While none of those who received feedback from regulators on the transaction reporting have been fined for the errors, Cappitech warned leniency is unlikely to continue indefinitely and firms should “not take too much comfort” from the relaxed approach from authorities so far.

“The partnership with Cappitech now enables us to help our clients seamlessly meet the requirements of transaction reporting and best execution under the regulations, without affecting their investment or operational workflow,” Alistair Downes, vice president of product at Red Deer, concluded.

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A majority of 68.4% of firms said they have received no feedback whatsoever from regulators on transaction reporting, widely regarded as one of the more burdensome requirements under MiFID II, according to a survey of banks, asset managers and other institutions from compliance technology provider Cappitech.

The remaining 31.6% respondents said they did receive some form of feedback on transaction reports, specifically on errors such as incorrect prices in currencies, mismatches between CFI codes, and other anomalies in identifier fields for clients.

While none of those who received feedback from regulators on the transaction reporting have been fined for the errors, Cappitech warned leniency is unlikely to continue indefinitely and firms should “not take too much comfort” from the relaxed approach from authorities so far.

“Although the majority of the market has not yet had feedback, the regulators are working their way around the market and have managed to see one third in just two years,” Mark Kelly, member of the advisory board at Cappitech, told The TRADE. “Regulators are using this time to work out where problems are systemic and require updates that need to then be circulated to the entire market. Individual firms who received direct feedback also need to implement suggested changes quickly as the regulator is less likely to be as understanding on future visits.”

The industry has recently seen two major fines for MiFID-related transaction reporting failures, which were handed to investment banks UBS and Goldman Sachs earlier this year by the UK’s Financial Conduct Authority (FCA). UBS was fined £27.6 million for 135.8 million errors when reporting transactions over the course of a nine-and-a-half-year period. Similarly, Goldman Sachs was fined £34 million for over 220 million transaction reporting errors between 2007 and 2017.

Elsewhere, the survey found that 61.4% of firms admitted they are not monitoring best execution, despite it being a requirement under MiFID II. Most firms said they have not implemented systematic monitoring processes for best execution. More than 70% are also not using the RTS 28 reports to make trading decisions, while 56.6% said they are not reviewing RTS 28 data.  

“The relatively low compliance to best execution monitoring is a real concern as is the fact that firms are not yet gaining additional benefits from the public RTS 27/28 best execution. The regulators have made it clear that this is central to ensuring best practice in trading execution on behalf of clients, and ultimately individuals’ savings and pensions,” Ronen Kertis, CEO and founder of Cappitech, told The TRADE. “We already see few EU regulators (NCAs) approaching their member firms with a request for more details or auditing their best execution monitoring practices.”

The research follows a similar survey from Cappitech last year, which found that 56% of respondents who are legally obliged to produce RTS 27 best execution reports were not doing so, while 60% stated at the time that they have no intentions to use the RTS 27 reports internally to shape execution policies.

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