Complying with Complexity


We are no longer in an age of brokers trading shares in a splendid baroque room in Amsterdam, under a willow tree in lower Manhattan, or in the coffee houses of London. We are no longer in an age of imposing 19th century bourgeois edifices lining Europe’s most important boulevards, underscoring the central position of finance - of stocks and bonds - for national economies as a keystone of Victorian social progress. And we are no longer in an age of outbound transfer of European thinking and law about securities finance to nearly every corner of the world – almost no matter what the political structure in place, the idea of marketable securities seems to have won the day. And it carries on, often in unlikely circumstances where the “soil” would have seemed too shallow for this “plant” to take root.

We are in an age where the price discovery of securities is being led by algorithmic computer programs. Most likely, we have been in this age for longer than we realized; certainly, it has been coming on for decades. The Computer Assisted Trading (“CAT”) software developed in Toronto is generally recognized as having been the first such electronic trading system established in a central, regulated marketplace. It was introduced in the now distant year of 1977, a full 40 years ago.

Today, exchanges offer the markets incomprehensively faster services for order execution. Almost as incalculable as the speed is the variety of cash and derivative instruments being offered and traded. All that is clear: the environment of finance in which people buy and sell “things” of value is utterly something else, and is taking place in strikingly different ways.

Yet these new markets are still regulated. Are we sure about compliance, and its twin named enforcement?

The Global Effects of National Regulation

Finance is heavily regulated, and for good reason: a very great deal of money is at stake. And generally speaking, law and regulation are national matters; it is rare that any form of supranational law gains primacy, though not unheard of, notably in maritime law. Nation states are responsible for their citizens, and so it is with finance where with the aim of protecting citizen-investors, all professional persons and the institutions they work for are licensed. Those licenses are most often subject to rigorous and regular inspection before certification is reissued, as it should be.

Whilst the act of buying and selling securities seems to be straightforward at first glance, on second glance and afterwards it is anything but. What varies from country to country, and from actor to actor, is access to corporate and national economic information, the tools to analyze it, and the technological means to act upon those assessments. This leads governments to proceed in very different ways to protect what they see to be their national interests as they set out their specific frameworks, and so different law and regulation for what otherwise seemed to be just straightforward execution of buy and sell orders.

In an era of global financial flows and mostly open borders, it follows that one’s yen, dollars, euros, or pounds have to adapt somewhat when entering a new national environment, and these days that happens instantly.

There is also the competition of nations. It seems that for the past several decades, changes in US law and regulation gave the impression, perhaps also the reality, that its sort of regulated marketplace would come to impose itself on others abroad: think the end of Glass-Steagall, Regulation ATS, Regulation NMS. Europe had its own responses with regulations for transparency, listing prospectuses, and then its efforts to structure the market with the original MiFID, which entered into force in 2007. That last Directive was vaunted as so world-leading that the EU model would set the pace everywhere. (This did not happen, but then the particular European mix of countries under a supranational framework would be hard to replicate.)

Only three years later, but a world away after the Global Financial Crisis, the United States Congress promulgated the Dodd-Frank Act, a vast piece of complex legislation. Since then, the European Union has launched EMIR, CSDR, and is on the cusp of final implementation of MiFID II, perhaps an even heftier reformulation of market structure than Dodd-Frank.

There is more to the world of finance than the US and EU, but given their heft and the global positions of their largest institutions, like it or not they either set the pace or lead to some adaptation of national rules elsewhere.

Literally on top of this pushing and shoving of nation-states, global authorities have continued their work on standards, notably the Basel Committee’s bank capital requirements, now in its third iteration; and the CPSS-IOSCO work on standards for market infrastructures, the entities that support trading by handling the administration of transactions.

For those dealing in multiple marketplaces, how does one know which standards and regulations to follow? What happens if my national framework does not fit directly with global principles, which frankly are often ignored when they prove to be inconvenient. But the same can be true for a service that crosses the boundary of another jurisdiction – inconveniently, that actor has entered a different national domain where the authorities do have the sovereign authority to supervise and, if need be, to penalize, in the name of their national interest. Many EU and US texts are expressly written to have extraterritorial effect.

The scene has been set for contravening purposes and conflict among regulators who compete to defend and promote their national interest. That may be all good and well if the effects were only national, but they are not. The global scene is yet more complex: if the EU is considered as a whole, the authorities in the world’s two largest marketplaces have shattered the central market pricing, on top of which trades are occurring at incomprehensible speeds.

Trying to Comply but perhaps not Succeeding

What does the compliance function do when national does not meet foreign and global? With the best of intentions, they certainly must meet the demands of their local government, knowing that this is likely to mean that they could come up short elsewhere, entirely inadvertently. How else could it be when there is global finance without a unified global environment with rigorous enforcement?


The anticipation of the moment is MiFID II, one of whose key goals is to promote transparency and so fairness, and enforce best execution of orders. Well, no one wants to have a trade poorly executed, so on the face of it this would seem to be good public policy. And who would argue against the ambition of more fair markets?

The difficulty is not the goal but rather the context. For the European Union, trading across all these platforms is not consolidated – the complexity of fragmentation leapt ahead of the ability to keep up. Fragmentation itself was the goal at one point, to force competition. But the pieces are broken and cannot be glued back together; and in the absence of hard numbers, there will be qualitative assessments as to how well the broker traded on behalf of her/his client.

The relevance of Thomas Murray’s services

This note is about complying with the rules, and it is written almost on the eve of MiFID II. Notwithstanding the reservations above about financial policy and its confusions, and the extraordinary complexity of the environment,they are what they are; these things are meant to be implemented and enforced somehow. They cannot be ignored, though one can question how meaningful the outcomes will be.

As client scramble, and with rules not yet finalized some 100 days ahead of the starting gun, preparations are certainly underway. As the new order arrives, those clients will want to know if they have properly retuned their work. They will be wanting advice and above all independent validation that they are meeting the new regulatory requirements, which is very much Thomas Murray’s strong card. There is no one thing that adds up to MiFID II that needs to be checked; it is rather the countless new tasks that have to be verified.

Firms outside the EU will need to know what it will take to comply, too, for many of their lines of business are meant to be captured in the regulatory net of MiFID. Meanwhile, Basel III and CPMI-IOSCO global principles need to be complied with, and the trading position and order execution effects on bank balance sheets and market infrastructures are further unknowns.


Even the best-informed observers do not pretend to foresee what markets will look like come January 2018, and not only for the European Union. As so frequently happens, chains of trades cross multiple jurisdictions – which regime will apply? Who will know what to follow, and how fast can one figure out the myriad bits and pieces?

With the best will in the world, how does one comply with complexity? Will those charged with enforcement be able to figure out what will be effective and fair? Will this turn out to be like mandatory OTC trade reporting to repositories whose giant data bases hold information that is not terribly well exploited? Thomas Murray Data Services will be following the shake-out, and figuring out what clients’ monitoring needs are.


The author, Thomas Krantz, is Senior Advisor, Capital markets, in the firm of Thomas Murray; and served as Secretary General of the World Federation of Exchanges (2000-2012). The views expressed are his own, and not necessarily those of the firm.

Tags: SecuritiesComputer Assisted Trading softwareRegulationcomplianceMiFIDDodd-Frank ActEMIRCSDRMiFID IICPMI-IOSCOBasel IIIOTC trade reporting