MiFID II and time synchronisation in financial services
Author: Simon Kenny, CEO, Hoptroff
As Britain is now well and truly out of the European Union, financial services professionals and politicians debate whether the MiFID II financial regulations should be scrapped.
Some have argued that MiFID II was shaped around European needs and will shortly no longer affect Britain. However, this view severely understates the central role that Britain played in shaping MiFID II, which focused on the urgent need for financial regulation as the finance sector expanded into the fintech world.
From its very inception in 2008, the predecessor, MiFID I, sought to restore public financial confidence after the crash of 2007.
Financial regulation and clock synchronisation to improve data quality
Synchronised timing is one area of MiFID II which has been accepted by market participants as an essential method of improving data quality within an audit chain. MiFID II requires every server that is an active market participant to have a maximum divergence of between 100 microseconds or 1 millisecond from the benchmark of UTC. This means application timestamps will be consistently reliable for audit purposes or reconstruction of events.
Without clock synchronisation, servers will drift. If different clocks in a shared network drift by even small amounts, audit trails become chaotic. The timestamps become unreliable, sequence and interval in the logs cannot be trusted, and it becomes extremely difficult to track the enormous amount of digital data which is transferred every single second of the day.
More examples of the consequences of unsynchronised time are consistently emerging. How can the Bank of England ensure that nobody is profiting by arbitraging the delay from the video feed of the bank’s policy announcements versus the faster audio feed delivery?
How should online gambling applications react when people are ‘Courtsiding’ at Wimbledon are seeking to arbitrage the latency between when a bet reaches an application gateway versus the slower delivery of television signals reaching a TV set?
The answer is that they need to improve their clock synchronisation across their processes, so that they can reconcile when an event happened in the real world and when an application recorded it. As applications become faster and more distributed, it is inevitable that latency differences emerge between the older applications and the new. However, if all the clocks in the process share the same, accurate time, the latencies will no longer be hidden and more difficult to exploit.
In 2018, MiFID II took decisive steps to resolve these problems in financial services. Its enforcement of firm rules on timing infrastructure has resulted in progressive technology innovation, meaning that it has never been easier, and cheaper, to ensure accurate time.
Companies wanting to install synchronised time no longer need to install individual grandmaster clocks exclusively for their own use. Instead, they can download highly accurate software that connects to trusted timing sources using their existing connectivity. This would be effectively renting access to grandmaster clocks in the cloud as a subscription service to enable companies to execute existing obligations for less.
We need global trust in financial services
MiFID II demanded that any digital financial transaction that occurs across EMEA must be traceable with precision timing and inventive new software has made it happen. Britain will need these strong financial regulations as its global trading presence shifts to become more independent in the coming months and business emerges from the triage phase of the pandemic crisis.
Firstly, maintaining the European standard of MiFID II ensures continued access to the EU’s trading bloc. In 2018, the EU launched the ‘Equivalence’ system, which stipulates that the access of British financial services firms to the bloc is dependent on whether British financial regulation continues to be as stringent as the European Union’s.
Secondly, any changes to MiFID II would only further shake public and investor trust in the market, which is vital to investor confidence. This was exemplified in early February when the sterling dropped significantly against the US dollar following a Bloomberg discussion about a MiFID “shake up” by the ESMA).
MiFID II has made the financial world a more accountable and reliable place. It promotes international trust in the data quality of financial services through its support of critical infrastructure such as timing resilience.
Discussion of terminating MiFID after Brexit adds doubt about future of financial standards and creates unnecessary risk for the British economy. We may wish to unilaterally control the standards under which we operate, but if we want to trade with others, we need to cooperate on regulatory matters so our partners trust our standards and market confidence is protected.
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Hoptroff Traceable Time as a Service (TTaaS®) is a range of network and software-based timing solutions that are simple, resilient, cost-effective and MiFID II compliant.
Whether you need the security of verifiable time for compliance, protection from risk and fraud, or want transparency and efficiency, our obsession with accuracy will transform your business.
