TY - JOUR AU - Sheridan,, Iain AB - 1. Introduction MiFID II1 and its accompanying Key points This article examines how UK Financial Technology (FinTech) firms may be regulated under MiFID II. Accommodating novel technological methods into MiFID II is a potentially formidable challenge, because the genesis of MIFID II occurred before the emergence of FinTech. Mainstream FinTech activities are examined, namely algorithmic trading, high-frequency algorithmic trading and distributed ledger technology. Regulatory Technology (RegTech), a sub-set of FinTech, can benefit regulators. The MiFID II third country equivalence regime is analysed as a set of rules that could benefit from distributed ledger technology. This article concludes that the success of both FinTech and RegTech lie in accelerating human adaptability to grasp technology. This acceleration has to be achieved by capital markets and regulators, and less intuitively by their joint collaboration. regulation MiFIR2 (hereafter MiFID II), cover many aspects of financial regulation within and into the EEA, including, among other things, algorithmic trading, best execution, client classification reviews, senior management obligations, third country impact (extraterritorial) rules, trading obligations of derivatives and securities, transparency and transaction reporting. From 3rd January 2018, MiFID II rules are currently scheduled to come into effect for all investment firms.3 Given Brexit was triggered on 29 March 2017, this is approximately less than the half way point in Brexit negotiations. Further, whatever is agreed ultimately with EU Member States and the UK there will be transitional arrangements. Any practical transitional period would be approximately two years.4 Therefore, MIFID II is quite likely to apply to UK regulated firms until at least 2020.5 2. The essence of Financial Technology—three characteristics Financial Technology (FinTech) has no precise legal term given that it covers the whole range of human ingenuity linking finance and technology. The Oxford English DIctionary definition refers to ‘computer programs and other technology used to support or enable banking and financial services’. Seasoned capital markets practitioners and scholars can be sceptical about FinTech. They often pose the question is this old wine in new bottles? For instance, contemporary commentators on FinTech seem to omit reference to a well-documented history of technology simplifying financial services for decades to gain a competitive advantage or increase productivity. As just three examples, the Automated Teller Machine (ATM) machine was first placed in UK bank walls from 1967; the Society of Worldwide Interbank Financial Telecommunications (SWIFT) was established in 1973; and the use of the London Transport Oyster electronic payment ticketing card system has been in use since 2003.6 Arguably, the novelty of FinTech reflects a change to multiple-layers of technology utilized by capital markets participants which in time are very likely to transform wholesale payments, clearing and settlement. In my view, the recurring characteristics of FinTech business are (i) disruptive innovation7 occurring, (ii) free from legacy technology systems and with (iii) asynchronous compliance. To this trio might easily be added the elements of scalability achieved via cloud computing, initiatives constrained by low budgets,8 a focus on smart phone platforms and the mindset of the millennial generation. Yet the essence remains asynchronous compliance, partial or significant disruption and legacy-free technology. To briefly elaborate, disruptive innovation involves a new business entering an established market and competing successfully with innovative products or services against the formidable market share and entrenched alliances of incumbents. Looking at the rise of both Airbnb and Uber in their respective sectors underlines how unintuitive and astonishingly effective disruptive innovation can be. In the FinTech sub-sector Distributed Ledger Technology (DLT)9 is a potential disruptive innovation that is attracting considerable attention in capital markets. For instance, the Financial Conduct Authority (FCA) predict that DLT will enhance the efficiency of collateral management for OTC non-cleared derivatives contracts.10 The current regulation on initial margining requirements factor in the time between the most recent exchange of collateral for transactions with a defaulting counterparty and when those transactions can be closed out. The legislated period for this so-called margin period of risk is currently 10 days.11 It is possible that under a DLT platform this risk could be minimized to intra-day.12 Second, legacy-free technology systems present an advantage to FinTechs, because they are competing against traditional investment banks and fund management businesses burdened by established computer systems. Comparable with the trusted foundations of a house, a large bank or fund manager can alter and extend many aspects of its business but faces insurmountable cost, efficiency and risk challenges if attempting to change its core computer systems. For instance, there would be algorithmic trading initiatives that function fully via state-of-the-art hardware and proprietary software. While established incumbents may have large technology budgets, the challenge would be how to seamlessly integrate cutting-edge hardware and software. Third, asynchronous compliance characterizes the recurring situation that FinTech companies face, namely business strategies and operations that are moving at markedly different speeds compared with financial services regulation. This asynchronous timing creates uncertainty that dynamic business initiatives meet regulatory requirements. That is, in my view, different from previous changes to technology, such as the growth of the Internet and consequent minor changes to regulation. With FinTech the activities and technologies are often radically different on many levels. Given most FinTech has occurred several years after the original drafting of MiFID II, this provokes the question how do numerous MiFID II rules apply logic and certainty to the FinTech sub-sector? Two examples, algorithmic trading and distributed ledger technology, reveal the challenges ahead. 3. Algorithmic trading Algorithmic trading concerns computerized trading with no or limited manpower in the trading process. Trading based on an algorithm used to have an air of mystique about it, but not anymore. Currently, 75 per cent of equities trading and 40 per cent of foreign exchange trading relies on algorithmic processes.13 Specifically in the MiFID II rules, algorithmic trading refers to ‘trading in financial instruments where a computer algorithm automatically determines individual parameters of orders such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission, with limited or no human intervention’.14 A key aim of MiFID II is to increase and maintain transparency for the protection of investors. Recently a data scientist encapsulated the challenge of algorithmic technology in this way: ‘Algorithms and machine learning techniques pose big questions around accountability and oversight. How can we achieve true transparency for algorithms written in code that few can understand? Or where constantly changing input data or their ‘black box’ nature means that it is difficult or even impossible to decipher how algorithms reach decisions? Or where for security or proprietary reasons algorithms cannot be published.’15 Disclosing algorithmic strategies Under Article 17(2) of MiFID II, a competent authority16 ‘may require the investment firm to provide, on a regular or ad hoc basis, a description of the nature of its algorithmic strategies, details of its trading parameters or limits to which the system is subject’.17 The draft FCA MAR 7A.3.7 R states that a firm must provide, among other things, the following at the FCA’s request within 14 days:18 a description of algorithmic trading strategies; details of the trading parameters or limits to which the firm’s system is subject; evidence that MAR 7A.3.2R (systems and controls) and MAR 7A.3.3R (business continuity and system tests) are met; details on the testing of the firm’s systems. 4. The challenge of balancing compliance and protecting intellectual property Article 10 of the European Commission delegated regulation C(2016) 437 (supplementing Article 48(6) of MiFID II) requires regulated entities that use algorithms to not only certify that the algorithm has been tested to avoid market disorder, but also to provide a full explanation to the regulator of the testing used. Given algorithmic trading may often include potentially unique strategies, explaining the testing may divulge intellectual property (IP) to the regulator, which could in turn be leaked to competitors. This is not to imply the regulator would ever recklessly breach its duty of confidentiality.19 However, there would inevitably be conscious or unconscious leakage of valuable proprietary strategies because employees move back and forth from regulators to regulated businesses. The challenge for UK regulated firms is to balance compliance with financial services regulation and simultaneously protect IP in the form of trade secrets. This commercial point was raised by the International Securities and Derivatives Association (ISDA) in its response to the FCA’s proposed MAR 7 A, when it remarked: ‘ISDA members would like to understand if the intention of the FCA is to capture the detailed cases of each type of test … which may include proprietary information detailing the behaviour of the algorithm.’20 Compliance function understanding Under Art 4(2) of the EC delegated regulation C(2016) 437 (supplementing Article 48(6) of MiFID II) regulated entities that use algorithms must ensure their compliance function ‘has at least a general understanding of the way in which algorithmic trading systems and algorithms operate’. The UK regulators will need to factor in the relative scarce resources of many FinTech firms versus any benefits from the extra investment required to train compliance staff. While the material incremental costs involved in regular reporting to the FCA are unclear, these could be substantial. Moreover, many FinTech ventures in the start-up phase have modest compliance budgets. Under section 138 J FSMA the UK regulators have a statutory obligation to perform a cost–benefit analysis of new regulatory rules. For algorithmic trading, that analysis is complex. 5. High-frequency trading Algorithmic trading is also fundamental to high-frequency trading (HFT) driven by the exponential global increase in computing power at lower cost. HFT is a subset of algorithmic trading. The many patterns of HFT have been presented in detail elsewhere.21 An accurate characterization of HFT is that of proprietary trading with high daily volumes of orders utilizing spread and arbitrage strategies. Trading activity that applies HFT techniques must comply with not only the general rules relevant to algorithmic trading, but also specific rules for HFT.22 The UK FCA is likely to include specific rules for HFT in a new Market Abuse Regulation (MAR) 7 A chapter, but to date this has not been published.23 However, the supplementary EC Regulation 2017/589 on algorithmic trading was published on 31 March 2017 will be relevant in the UK from January 2018 and certainly continue to be influential.24 While it is currently unclear what the long-term impact of MiFID II rules on HFT will be, in Germany the ‘Prevention of Risks and Abuse in High-Frequency Trading Act’ (‘the German HFT Act’) has been in force since spring 2013. It is logical to think valuable lessons on whether HFT legislation is fit for the purpose may be drawn from Germany. Unfortunately, even in 2015, two years after the German HFT Act came into effect, no new businesses have requested an HFT licence.25 Nevertheless, it is likely some insights may in time emerge from BaFin given its earlier adoption in Germany. Article 4(40) of MiFID II mirrors the German HFT Act definition. In short, HFT is defined by (i) proximity to the trading market venue system; (ii) order execution without human intervention; and (iii) a high volume of intraday messaging activity made up of orders, quotes or cancellations.26 The incremental costs involved in regular reporting to the FCA or PRA are unclear. A UK Government Office for Science report on HFT entitled ‘The Future of Computer Trading in Financial Markets—An International Perspective’27 concluded that HFT compliance with Article 17(2) MiFID II was a substantial financial burden. 6. Distributed Ledger Technology Distributed Ledger Technology (DLT), colloquially referred to as blockchain, originated as part of the database that enables the trading of the so-called digital currency ‘bitcoin’. Protected by encryption, DLT is a database whose application and rules are agreed between members. Controlling membership can be from two actors up to many. There is not one owner or party controlling the database—all parties have equal access to the same information. Further, trust in the accuracy of the database does not require confirmation from an intermediary. While the evolving scope of its applications is uncertain, perhaps even over-stated in importance,28 DLT is viewed as having great potential.29 The growth in financial services sector interest in DLT cannot be denied. For example, IBM, in conjunction with the Economist Intelligence Unit, has analysed data from 200 banks and financial markets institutions in 16 countries.30 These results reveal an overwhelming zeal by both banks and financial institutions to develop and apply DLT in 2017. For financial markets institutions, the areas with the greatest potential benefit are, unanimously, clearing and settlements, equity and debt issuance, reference data and wholesale payments.31 The key areas from each report are combined in Table 1.32 Table 1 Capital markets activities to benefit most from DLT technology Clearing and settlements Collateral management Corporate actions Equity and debt issuance Identify and know your customer Reference data Syndicated lending Wholesale payments Clearing and settlements Collateral management Corporate actions Equity and debt issuance Identify and know your customer Reference data Syndicated lending Wholesale payments Table 1 Capital markets activities to benefit most from DLT technology Clearing and settlements Collateral management Corporate actions Equity and debt issuance Identify and know your customer Reference data Syndicated lending Wholesale payments Clearing and settlements Collateral management Corporate actions Equity and debt issuance Identify and know your customer Reference data Syndicated lending Wholesale payments 7. DLT initiatives under the FCA Sandbox regime Notably in the FCA regulatory Sandbox,33 a company has developed using DLT to facilitate the issuance of short-term debt.34 This DLT platform issued debt to investors and maintained records of client assets and client money. It allows reconciliation on an intraday basis. If permitted by the FCA it also can potentially allow the issuer to view each investor’s holdings and reconcile more frequently than on a daily basis. There is no reason to think this and other initiatives cannot be valuably applied in capital markets. It is important to stress that across the EEA there is not a mutually agreed set of structures and processes for Sandbox, so the extent and speed with which businesses adopting DLT technology are able to gain authorization in their own home regulator and in turn within the EU from the European Securities and Markets Association (ESMA), will vary. For example, the FCA Sandbox qualifying criteria include, among others, the requirement that the innovative good or service has already been tested to some degree for the applicant firm. It may be challenging for applicants to meet this criterion not because of lack of ingenuity on their part, but from each regulator’s view. Table 2 captures the top 10 ranked leading innovative countries out of 128 countries measured by the annual metric-based35 exercise carried out between ‘Cornell University’, ‘INSEAD Business School’ and the ‘United Nations World Intellectual Property Organisation (WIPO)’. This ranking is called the Global Innovation Index (GII).36 Table 2 The top 10 innovative countries Country GII ranking Sandbox or equivalent? Denmark 8th Announced 2016 Finland 5th Yes, est’d 2016 Germany 10th Not yet Ireland 7th Not yet Netherlands 9th Yes, est’d 2017 Singapore 6th Yes, est’d 2016 Sweden 2nd Not yet Switzerland 1st Yes, est’d 2016 UK 3rd Yes, pioneered in 2015 USA 4th Announced 2016 Country GII ranking Sandbox or equivalent? Denmark 8th Announced 2016 Finland 5th Yes, est’d 2016 Germany 10th Not yet Ireland 7th Not yet Netherlands 9th Yes, est’d 2017 Singapore 6th Yes, est’d 2016 Sweden 2nd Not yet Switzerland 1st Yes, est’d 2016 UK 3rd Yes, pioneered in 2015 USA 4th Announced 2016 Table 2 The top 10 innovative countries Country GII ranking Sandbox or equivalent? Denmark 8th Announced 2016 Finland 5th Yes, est’d 2016 Germany 10th Not yet Ireland 7th Not yet Netherlands 9th Yes, est’d 2017 Singapore 6th Yes, est’d 2016 Sweden 2nd Not yet Switzerland 1st Yes, est’d 2016 UK 3rd Yes, pioneered in 2015 USA 4th Announced 2016 Country GII ranking Sandbox or equivalent? Denmark 8th Announced 2016 Finland 5th Yes, est’d 2016 Germany 10th Not yet Ireland 7th Not yet Netherlands 9th Yes, est’d 2017 Singapore 6th Yes, est’d 2016 Sweden 2nd Not yet Switzerland 1st Yes, est’d 2016 UK 3rd Yes, pioneered in 2015 USA 4th Announced 2016 It is thought provoking that 7 of the top 10 countries in Table 2 have established or announced the intention to establish Sandbox programmes. One can infer from this that FinTech businesses growing in these leading innovative jurisdictions may be better supported by their relevant home regulators.37 8. MiFID II and Regulatory Technology A sub-branch of FinTech is Regulatory Technology (RegTech) which refers to the application of technology by businesses or public organizations, including regulators, to automate compliance with rules or in some other way significantly improve the processing of regulation.38 As just one example, of what could be achieved in the future by exploiting DLT, consider the issue of equivalence decisions under MiFID II.39 The equivalence rule allows third country firms to operate in EEA Member States on similar terms to those granted by the EU financial passport.40 The pivotal rule is that the third country’s regulation and supervision arrangements have to be assessed equivalent to the EU. Article 47 of MiFIR provides for third country equivalence so that the non-EU firm may be treated as if it is an EU regulated firm on condition that its third country regulator has the following characteristics: robust authorization processes41 and also provides effective, ongoing supervision of its regulated firms; sufficient capital requirement rules and other suitable rules governing shareholders and management; adequate organizational controls exist including internal control functions; appropriate conduct of business rules; and appropriate market abuse rules.42 However, FinTech firms providing new-fangled, novel services with complex technology may be confronted by additional hurdles based on a lack of understanding before they can rely on equivalence, so it cannot be assumed that based solely on FCA or PRA approval FinTech business will proceed without challenge from other EU regulators. Currently under Article 46(4) MiFIR a third country firm is required to submit its application to provide investment services in the EU directly to ESMA. ESMA has up to 30 days to confirm if the application information is complete. Subsequently within 180 days ESMA has to grant or refuse the application. In my view, a logical and achievable RegTech solution lies in the form of an international DLT. My proposal is that a publicly-viewable DLT is agreed between EU Member State regulators and ESMA to record third countries whose regulations it has judged MiFID II equivalent along with other key details. Logistically, it would be relatively straightforward for ESMA to establish the top 30 third countries conducting financial services business in the EU and confirm these first. The ability and willingness of ESMA to promptly confirm equivalence of third country rules is influenced by several key factors, including political motives and bureaucracy. So it makes sense to have public transparency on how long it takes in practice. With equivalent status of third country rules decided and stored in the DLT, the process can work as set out in Table 3.43 Table 3 A proposed RegTech DLT system for MiFID II third country firm authorization 1. Article 46(4) MiFIR allows ESMA 30 working days to confirm that the third country firm application is complete or not, excluding time elapsed for additional information requests. 2. Adjacent to the ESMA date of application receipt and any time elapsed for additional information requests, each third country regulator would record succinctly its reasoning why the third country regulation is equivalent based on a comparison of the intent and effect of its laws. In this way, there is a transparent record of comparison across jurisdictions that may deter excessive delay and inconsistent treatment. 3. Within 180 days ESMA approves or rejects an individual third country firm application. 4. An ESMA approval is recorded in the DLT confirming equivalence of a third country under Article 47 MiFIR—the approval is instant and public. 5. In the event that ESMA rejects a third country application because its rules are judged not equivalent to MiFiD II rules, a succinct reason would be stored on the DLT. 1. Article 46(4) MiFIR allows ESMA 30 working days to confirm that the third country firm application is complete or not, excluding time elapsed for additional information requests. 2. Adjacent to the ESMA date of application receipt and any time elapsed for additional information requests, each third country regulator would record succinctly its reasoning why the third country regulation is equivalent based on a comparison of the intent and effect of its laws. In this way, there is a transparent record of comparison across jurisdictions that may deter excessive delay and inconsistent treatment. 3. Within 180 days ESMA approves or rejects an individual third country firm application. 4. An ESMA approval is recorded in the DLT confirming equivalence of a third country under Article 47 MiFIR—the approval is instant and public. 5. In the event that ESMA rejects a third country application because its rules are judged not equivalent to MiFiD II rules, a succinct reason would be stored on the DLT. Table 3 A proposed RegTech DLT system for MiFID II third country firm authorization 1. Article 46(4) MiFIR allows ESMA 30 working days to confirm that the third country firm application is complete or not, excluding time elapsed for additional information requests. 2. Adjacent to the ESMA date of application receipt and any time elapsed for additional information requests, each third country regulator would record succinctly its reasoning why the third country regulation is equivalent based on a comparison of the intent and effect of its laws. In this way, there is a transparent record of comparison across jurisdictions that may deter excessive delay and inconsistent treatment. 3. Within 180 days ESMA approves or rejects an individual third country firm application. 4. An ESMA approval is recorded in the DLT confirming equivalence of a third country under Article 47 MiFIR—the approval is instant and public. 5. In the event that ESMA rejects a third country application because its rules are judged not equivalent to MiFiD II rules, a succinct reason would be stored on the DLT. 1. Article 46(4) MiFIR allows ESMA 30 working days to confirm that the third country firm application is complete or not, excluding time elapsed for additional information requests. 2. Adjacent to the ESMA date of application receipt and any time elapsed for additional information requests, each third country regulator would record succinctly its reasoning why the third country regulation is equivalent based on a comparison of the intent and effect of its laws. In this way, there is a transparent record of comparison across jurisdictions that may deter excessive delay and inconsistent treatment. 3. Within 180 days ESMA approves or rejects an individual third country firm application. 4. An ESMA approval is recorded in the DLT confirming equivalence of a third country under Article 47 MiFIR—the approval is instant and public. 5. In the event that ESMA rejects a third country application because its rules are judged not equivalent to MiFiD II rules, a succinct reason would be stored on the DLT. A secondary valuable benefit of this specific DLT, could be for the UK FCA and other third country regulators to also uniformly record firm by firm authorizations and permissions. Each home regulated firm entry would include succinct but sufficient detail. For instance, the full name of the regulated firm, unique identifying numbers, its registered address, a generic compliance function email address (compliancedept@xyzlimited.co.uk) and the activities it is regulated to conduct. An agreed DLT protocol between all participating regulators would mean that there is no concern that the detail is insufficient or cannot be trusted. For the above RegTech processes to be fully effective, future amendments to MiFID II will need to cover many activities and all client categories. Some would argue that this type of third country access to the EU via the ESMA application process is too time-consuming and vulnerable to political influence from the European Commission.44 But while the degree of effectiveness may be hard to predict, DLT would be a highly appropriate medium to maintain transparency on application time-scales. Put another way, if the bedrock of MiFID II is transparency, ESMA’s use of DLT would display the quality of leading by example. 9. The challenge of improving human adaptability to both regulation and technology There is a mutual self-interest in accelerating human adaptability to close the gap between technological progress and financial services regulation. MiFID II is the foundation of EU-wide regulation for the foreseeable future. Whether technological advantage revolves around algorithmic trading, HFT or DLT or all three, there is a potentially damaging gap between technological advancement and regulation.45 Arguably, part of the FCA’s ability to maximize the amount of regulation that keeps pace with technology requires far greater collaboration with industry participants. That innovation has so often thrived in private–public partnerships gives room for optimism. In Thomas Friedman’s latest book46 he draws the following conclusion: ‘Every institution, whether it’s the patent office … or any other major government regulatory body, has to keep getting more agile—it has to be willing to experiment quickly and learn from mistakes. Rather than expecting new regulations to last for decades, it should continuously re-evaluate… . Government regulators need to take a similar approach. They need to be as innovative as the innovators. They need to operate at the speed of Moore’s law.’47 For regulators applying MiFID II, there is nothing, in my view, to be feared from evolving to a state of responding constantly to change. To borrow Freidman’s pertinent metaphor of riding a bicycle, ‘you cannot stand still, but once you are moving it is actually easier’.48 10. Conclusions The application of MiFID II to FinTech will be challenging, but it has plenty of scope to accommodate most FinTech business models, especially when assisted by Sandbox or equivalent regulator programmes. Algorithmic trading regulation similar to the MiFID II rules will come into force in the USA and already exists in Singapore.49 So congruence of future EU and UK regulation maximizes the potential global offering of FinTech businesses. Ultimately, MiFID II is achieving greater transparency not only with algorithms, but as algorithmic trading takes on increasing complexity and significance it is reasonable to expect regular revision of financial services regulation whether from the FCA or ESMA or both. In closing, it is evident there is increasing symbiotic collaboration between pioneering FinTech companies and incumbent financial services businesses. Perhaps less intuitively, is the increasing importance of collaboration and a willingness to make mistakes that will reduce the gap between technology and effective regulation.50 To expand upon Friedman’s metaphor, FinTech companies and regulators may often need to ride in tandem. Footnotes 1 See MiFID II, 65/2014/EU. Entered into force 2 July 2014. 2 See MiFIR, 600/2014/EU. Entered into force 2 July 2014. 3 There is also the requirement to comply with systematic internalizer obligations by 18 January 2018. However, given its complex remit, MiFID II may be delayed despite the fact it is scheduled to be in force by the beginning of 2018. 4 A point echoed in para 101 of the House of Lords, European Union Committee, 9th Report of 2016–2017, entitled ‘Brexit: financial services’. 5 An alternative real possibility is that MiFID II is rejected by the UK as part of its Brexit negotiations. 6 In fact, the origins of the Oyster ticketing card system are Hong Kong’s Mass Transit Railway (MTR) which implemented its Octopus card over 20 years ago in 1997, with trials starting three years earlier in 1993. 7 Disruptive innovation may be either a significant change or improvement primarily achieved with technology. See IOSCO Securities Markets Risk Outlook 2016, at p 27. 8 Part of the creative energy of FinTech can derive from low budgets, accepting that innovation has so often proved to thrive on paucity. But tight cost-management is hardly unique to FinTech businesses. 9 DLT is discussed later in this article in the context of Regulatory Technology, a sub-branch of FinTech. 10 FCA Discussion Paper, DP17/3, April 2017, ‘Discussion Paper on distributed ledger technology’, at p 25. 11 Regulation 648/2012, delegated regulation on regulatory technical standards for uncleared OTC derivatives contracts. 12 In the FinTech sub-sector a memorable retail foreign exchange example is Transferwise, an authorized Electronic Money Institution. TransferWise works on the basis of redirecting payments a customer requests for a foreign currency conversion to the recipient of an equivalent transfer going in the opposite direction. In doing so, the traditional processes of currency conversion and transfers crossing borders are avoided. See accessed 23 August 2017. 13 ‘The Promise of FinTech – Something New Under the Sun?’, speech by Mark Carney, Governor of the Bank of England, 25 January 2017. See accessed 23 August 2017. 14 See art 4 (39)MiFID II. 15 Philosophical Transactions of the Royal Society A, Mathematical, Physical and Engineering Sciences, ‘Data science ethics in government’, Cat Drew, published 14 November 2016. 16 In the UK this is ordinarily FCA rules. However, PRA rules transposed under MiFID II are also relevant to Capital Requirements Regulation (CRR) firms. See PRA CP9/16, March 2016. 17 FCA propose to draft a new MAR 7A to give effect to art 17 MiFID. See FCA CP 15/43, December 2015. 18 The ISDA Member response to the proposed FCA MAR 7A reflected that 14 days is too short a period to produce such detail. ISDA put forward extending the time to within 30 days. See ISDA Response to FCA’s MIFID II Implementation under FCA CP15/43, at p 22. 19 Indeed under art 76 (1) MiFID II there is a specific duty of professional secrecy imposed on competent authorities. 20 ibid, ISDA Response at p 21. 21 See Xetra Press Workshop, 8th May 2013, . 22 See FCA CP 15/43, at 8 (27 December 2016). 23 See . 24 See . 25 Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) Annual Report 2015. See . 26 BaFin Hochfrequenzhandelgesetz, effective 15 May 2013 and art 4(40) MiFID II. 27 ‘The Future of Computer Trading in Financial Markets—An International Perspective’ (2012) report UK by the Government Office for Science was based on the evidence of 150 leading academics and experts from more than 20 countries. See . 28 ‘Has the Blockchain Hype Finally Peaked?’, Financial Times (30 November 2016). 29 DLT also presents risk. For example, DLT smart contracts were hacked in June 2016. See ‘Hacker May Have Taken $50 Million From Cybercurrency Project’, The New York Times (17 June 2016). 30 IBM Institute for Business Value, ‘Leading the Pack in Blockchain Banking’, September 2016. See . The second report is entitled ‘Blockchain Rewires Financial Markets’, September 2016. See . 31 ibid, ‘Blockchain rewires financial markets’ at p 6. 32 The meaning of benefit in the context of both banks and financial markets institutions encompasses cost, risk and time. Ibid 5. Ibid, ‘Leading the pack in blockchain banking’ at p 5 and ‘Blockchain rewires financial markets’ at p 5. 33 Started in 2016, the FCA regulatory Sandbox provides a ring-fenced environment in which unlicensed companies, can test new technologies immune from the usual FCA or PRA regulatory consequences of engaging in the activity in question. 34 FCA DP 17/3, ‘Discussion Paper on Distributed Ledger Technology’, 18. 35 See . 36 The GII metrics are complex. Five categories of input data are examined, namely institutions, human capital and research, infrastructure and market sophistication. Two output categories are also included, that of knowledge and technology and creativity. See GII 2016, at p 14. 37 Regression analysis of a statistical sample of 30 to 40 top ranked innovative countries may reveal positive correlations between innovative countries and innovative regulators. 38 The FCA is fully supportive of RegTech initiatives and has already organized events attended by businesses and technical experts to think through possible innovations to regulatory reporting requirements. See . 39 See MiFIR art 47. 40 Equivalence only applies to specific activities. For instance, it does not include retail-focused goods and services. 41 The UK is certainly equivalent in the above respects, and has a reputation for gold-plated rules. Further, the establishment of the FCA’s regulatory Sandbox and other communication channels with FinTech companies infer it is authorizing with both a supportive spirit and prudence. 42 Art 47(1)(a)-(e) MiFIR, no 648/2012. 43 As a matter of efficient administration, The Licence Authentication DLT software simultaneously sends an email to confirm completion of the equivalence approval process to the third country firm. 44 See report by the International Regulatory Strategy Group (IRSG), ‘The EU’s Third Country Regimes and Alternatives to Passporting’, January 2017. This IRSG report argues that the third country rules are too linked and inefficient. The IRSG proposes instead a mutual access arrangement with mutual access between the EU and the UK. DLT may assist with this alternative arrangement given it would still require clarity and trust to understand which capital markets firms are regulated and also active across borders, 45 This gap ultimately holds back entrepreneurs, the UK economy and global trade. 46 Thomas L Friedman, Thank You for Being Late—An Optimist’s Guide to Thriving in the Age of Accelerations (Penguin 2016). 47 ibid 34–35. 48 ibid 34–35. 49 See . 50 ISDA argues collaboration between regulators and market participants on exploiting the potential of DLT is potentially important in derivatives markets. See ISDA Whitepaper entitled ‘The Future of Derivatives Processing and Market Infrastructure’, September 2016, at p 22. Author notes * Iain Sheridan is a barrister and the founder of Big Ben Law, London. © The Author(s) (2017). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com TI - MiFID II in the context of Financial Technology and Regulatory Technology JF - Capital Markets Law Journal DO - 10.1093/cmlj/kmx036 DA - 2017-10-01 UR - https://www.deepdyve.com/lp/oxford-university-press/mifid-ii-in-the-context-of-financial-technology-and-regulatory-dWBY6BPrBo SP - 417 VL - 12 IS - 4 DP - DeepDyve ER -