10 Takeaways From the FIX Regulatory Briefing

Technologists need to participate in regulatory commenting periods and regulatory ambiguity actually has some advantages.

The FIX Trading Community (formerly called FPL) put on an excellent regulatory briefing event in New York late last month. The topic was emerging global regulations affecting the electronic trading community across all asset classes. I took away a number of interesting insights. Here are some highlights.

1. Shifting Responsibility for Market Oversight

An interesting point emerged as the panel discussed some of the regulations now emerging globally. Responsibility for market oversight and the enforcement of orderly markets is shifting from SROs (self regulatory organizations) to market participants. Individual firms are expected to manage their systems’ compliance and integrity. This makes perfect sense, but now it’s being codified into the rules. Examples included Reg SCI, the CFTC Concept Release 2013, and the Hong Kong SFC Consultation Paper. In essence, according to the regulators, anyone who introduces disruption into a marketplace has responsibility. I expect to see more regulations of this nature in the future.

2. Regulatory Ambiguity Has Certain Advantages

The ambiguous nature of regulations came up repeatedly in the discussions. All panelists agreed that the rules are ambiguous by design. Generally, compliance officers like the ambiguity because it gives each firm the opportunity to interpret implementation based on their business model. But this can also lead to problems, because no one in the industry is certain how the regulators will interpret the rules until enforcement actions occur. When that happens, compliance officers around the industry get busy, reviewing the enforcement documents, identifying the issues, and testing their own firms’ policies and procedures to see how they would stand up against the same scrutiny. The SEC’s recent Rule 15c3-5 enforcement action was brought up as an example. In this case, the ambiguity made it tricky to predict how the regulators would enforce the rule. Now the industry has better insight.

3. Everyone Needs to Participate in Comment Periods

Across the board, there was strong agreement about the need for all industry participants to be more proactive in responding during the comment periods for proposed regulations. This is our opportunity to discuss the issues, and it’s critical that the regulators get input from all portions of the industry. Different contingents will have opposing positions, but that’s part of what makes the process work.  For example, RegSCI received 59 comment letters and 18 meetings with SEC staff. This is the kind of commenting every rule should receive. Incidentally, we have very little time left to respond to the 127 questions posed in the CFTC Concept Release 2013. Has your firm submitted responses yet?

4. Commenting Can Result in Delayed Implementation

Manisha Kimmel, the executive director of the Financial Information Forum (FIF), pointed out that every rule FIF has commented on ended up being delayed. So even if the comments don’t ultimately effect changes in the rules, it can help buy the industry more time for implementation. Panelists pointed out how delays have been helpful in allowing them more time to refine their implementation approach and be more prepared.

5. Last Minute Rule Delays are Problematic for Some

The panel discussed how often rule delays are not granted until a few days before (or even on the day) the rule was to go live. Delays may be beneficial for banks, but delayed implementations can have a very negative effect on vendors. One panelist pointed out that they’re planning their 2014 roadmap now. They have to guess at which rules will be required and when, so they can assign resources and plan development projects. Every time a new rule is introduced, affected vendors have to invest substantial resources to be ready on time. Last minute delays affect their ability to be responsive. In many cases, last minute delays force vendors to roll back a new release, directly impacting customers and demanding more time and resources. This affects their ability to provide other critical updates and deliver on other features needed by clients.

Banks also complained about last minute announcements of delays.

6. Get Input from the Technology Teams During Comment Periods

Everyone on both panels agreed that regulators consistently underestimate what it will take to implement new rules. The consensus is that technology teams need to get involved in the process earlier. Generally, IT is not involved in the comment period, but they should be. They should be engaging with the compliance and business teams to evaluate what would be necessary to comply based on different interpretations of the rule. That will also allow commenters to provide a more informed analysis of what will be required for implementation, which also might give the regulators improved ability to estimate the time and cost impact for each new rule.

7. Technology and Compliance Collaboration is Critical

Regulations are almost always pretty ambiguous. All the panelists agreed that this is valuable. The ambiguity allows each firm to interpret the rule and customize implementation according to their own business model. But the ambiguity also leads to complexity in figuring out how to implement a rule. Compliance officers need to collaborate more with the technology team. Involve technology teams early in the process – having them review the proposed regulations and discuss what will be needed technologically to implement. Every voice impacted needs to be involved in determining the best approach. Not only do teams need to discuss technical feasibility, but they also need to understand what other things won’t get done while resources are dedicated to a particular rule implementation.

8. More Industry-Wide Collaboration is Needed

One of the panelists pointed out that there is no competitive advantage to implementing a regulation differently than the rest of the Street. Firms need the ability to customize their business models, but most want to ensure that their approach is similar to what others are doing. Our industry needs opportunities to collaborate and discuss regulatory initiatives. These discussions should involve compliance, risk management, trading and technology personnel. Apparently, there is some sort of forum for regulatory officers, but they don’t even know that the FIX Trading Community exists. But these compliance people generally don’t understand the technology issues.

9. Regulators are Hiring More Practitioners

One of the panels pointed out the trend for the regulators to hire more practitioners instead of lawyers. This is an important trend, and in my opinion, it’s about time! Regulating the electronic trading markets is a daunting task. Given the massive amounts of data and demands on processing and massaging the data to detect market manipulation, only practitioners with extensive market knowledge and quantitative skills will be able to detect the patterns in the data and expose violations. However, the regulators’ budgets continue to be an obstacle in hiring sufficient knowledgeable resources.

10. New Format, Excellent Panels

We tried a new approach this year. We reduced the number of panels, seated everyone at round tables, and had break-out round table discussions after each panel. While it made the planning more complicated, I really liked this approach. It allowed all of us to actively participate in the conversation and to add more voices to the discussion. We’ll be trying it again at the Americas Regional conference in February. Overall, I think this is one of the best FIX conferences in years. Kudos to the entire conference planning committee and to the FPL staff for pulling together such an engaging conference. It’s always an honor to work with such a great team of people in planning these events. Thank you for allowing me to serve as conference committee co-chair again this year.

About The Author: Candyce Edelen is CEO of PropelGrowth, an agency helping financial technology companies develop and implement go-to-market strategies. Prior to PropelGrowth, she co-founded two financial technology companies including Selero, a company that provided order routing gateways, direct market access and FIX connectivity. She led teams in delivering FIX gateways to NASDAQ, Boston Stock Exchange and National Stock Exchange as well as dozens of other venues and brokerages. Edelen also was a conference committee co-chair for a recent FIX Trading Community regulatory briefing. Candyce Edelen is CEO of PropelGrowth, an agency helping financial technology companies develop and implement go-to-market strategies. Prior to PropelGrowth, she co-founded two financial technology companies including Selero, a company that provided order routing gateways, ... View Full Bio