New research from NPL, the UK’s National Measurement Institute, has shown a lack of awareness in the UK financial services sector around the new European Markets in Financial Instruments Directive (MiFID II) ahead of its imminent deadline, and many firms may fall short of compliance by employing inefficient means of timestamping.
The regulation, set to be implemented on 3 January 2018 will aim to provide harmonised regulation to improve transparency in trading across the European Economic Area and includes regulatory technical standards (RTS 25) that will require all trades to be timestamped to Coordinated Universal Time (UTC) with a high level of precision. Timestamps will need to be accurate to within a 100 microseconds of UTC for high frequency trading (HFT) – those noncompliant with MiFID II will risk fines of up to 5 million euros, or 10 per cent of global turnover.
According to the report, top line awareness of MiFID II is high, with 91 per cent of those surveyed aware of the regulation itself. 75 per cent of those claimed to know the deadline for compliance, but when asked to choose from a range of dates, two thirds (66 per cent) chose incorrectly. Most chose dates later than the deadline meaning they would miss this, highlighting a need for further education across the industry.
The research, facilitated by Censuswide, was based on responses from 200 professionals responsible for operations and/or regulatory compliance in the UK finance sector, including banks, hedge funds, analyst firms, investment management/advice and data centres. It demonstrates a clear will from industry to become compliant, with 89 per cent of those aware of the regulations taking steps towards compliance. However, according to the survey, the most common method currently used for timestamping is Network Time Protocol-based Internet Time, with more than half of respondents (56 per cent) employing it. This is only accurate to the tenth of a second and, while able to accommodate the requirements for human trading, such as over the phone and online, it cannot remain a solution for HFT and non-HFT, as these require 100 microsecond and one millisecond accuracy respectively under RTS 25.
The survey also highlighted the continued reliance on GPS for timestamping, with 14 per cent of financial services professionals responding using it, despite the majority (79 per cent) of those experiencing issues doing so, such as drop out, loss of accuracy, lack of synchronisation and leap second issues. GPS can be vulnerable to jamming and loss of signal, and can only ensure compliance with continual monitoring and calibration to ensure that it is traceable back to UTC.
The ideal method to deliver a precise time signal guaranteeing the accuracy required for RTS 25 is UTC delivery by fibre from a national timing institute. Research has shown fibre optics are capable of achieving accuracy better than 100 nanoseconds. However, while a fifth of respondents are using this method to keep to time (21 per cent), only around a third (32 per cent) of those taking steps towards compliance said they believed this to be the correct method to adopt – meaning firms could find their upgrades will still see them falling short of the regulations.
Dr Leon Lobo (pictured), Strategic Business Development Manager, NPL, says: “It is encouraging to see an understanding of the magnitude of the new regulations and a clear will from the UK finance industry to shape up for the regulation. However, what is equally important is to ensure that the efforts of industry are not wasted and there is a clear grasp of what level of accuracy constitutes compliance.
“Many of the current methods are problematic and opting to improve these will not guarantee the highly-accurate time standard which will ensure timestamps are easily certified. At NPL, the home of the UK’s national timescale, we provide the only precise time dissemination solution that is directly and physically connected to UTC – and that gives users confidence in their compliance, without additional monitoring and calibration needs or costs. NPLTime® is perfectly placed to meet the ever-increasing demand for precise timing ahead of MiFID II implementation in January 2018.”
