By Simon Kenny, CEO, Hoptroff
The financial services industry has recently been speculating whether MiFID II will be amended once the transition period is over and the UK formally leaves the EU this winter. The FCA (Britain’s Financial Conduct Authority) responded to this speculation in their August newsletter by reiterating the enduring importance of transaction reporting as part of financial regulation. They emphasised their position that transaction reporting is “crucial” to “ensure market oversight and the integrity of financial markets”.
A common standard of transaction reporting across Britain and Europe was first introduced in 2008. It has since become firmly established as an essential component of financial accountability that harmonises international trade. A decade later under MiFID II, the policy was developed further to meet the demands of an automated digital marketplace. A requirement was added, stipulating that all market participants should have traceable timing on active servers to sufficient accuracy, to enable their records to show events in the correct sequence and interval should there be a need to reconstruct particular trades. The final deadline for the implementation of this, as reminded by the FCA, is fast approaching: December 31st.
Traceable Time as a Reporting Solution
Financial firms are now looking for solutions that can update the way that they implement transaction reporting to include traceable timing in a cost-effective way. It is expensive and complex to solve using hardware at many different locations, so many companies are considering adopting time as a network service instead.
Traceable Time as a Service (TTaaS) installs software on servers that connects to timing signals derived from primary sources of UTC via network fibre. The software then synchronises the local server clock to UTC and keep a record of the chain of comparisons with the network timing source so any timestamp can later prove it is true. The benefits of this are numerous.
Firstly, TTaaS can usually be implemented without the need for any additional hardware or network connectivity from the customer. This saves on investment and greatly simplifies the operation of traceable timing. Hardware installations take extensive maintenance and monitoring to ensure they are operating correctly.
In contrast, TTaaS is a fully integrated service, where the service provider maintains the infrastructure under a SLA and performs the monitoring and logging required to maintain traceability.
Secondly, Traceable Time as a network service is highly resilient to disruption. Many market participants rely on a GPS satellite connection for accurate time. However, as localised disruption of GPS signals becomes more common through the use of inexpensive jamming devices, companies need to find resilient alternatives to satellite that can either replace or augment GPS as a timing source.
TTaaS is designed to be highly resilient to disruption; it uses multiple satellite constellations, plus terrestrial time sources to feed its cloud hubs. Its clocks can hold over for long periods if connection to primary sources is ever disrupted and the hubs have multiple network connections to distribute time from.
A Smoother Reporting System
TTaaS offers a simpler, more resilient, and more cost-effective architecture than the old model of hardware at many locations, that required customers to buy and integrate multiple components themselves.
A high proportion of the long-term costs of a traceable timing system are made up of the human resource required to monitor the system to make sure it is working properly. Even the most efficient of installations clocks will develop problems: GPS connections will be disrupted, and logs will be damaged.
TTaaS outsources all those tasks to a dedicated service provider whose expertise is in managing synchronisation. This means the customer has a smoother operating experience and staff are freed up to concentrate on other issues.
Leading the Way
As TTaaS provides a more reliable, accurate, and resilient method of transaction reporting within the financial services industry, other industries that are adopting automated systems for trading have begun to take notice.
The gambling industry is one such example; the time lapse between when an in-play bet is placed and the event the gambler has predicted actually occurring, such as a red card in a football match, can be very small.
Some gamblers have noticed that there is a latency between when a particular action happens live at an event and when TV signals report it to host applications. They have realised that a bet, placed after the predicted event happens, might reach the gambling application gateway before the TV signal does and hence might be accepted as legitimate.
This risk for the gambling industry, referred to as “Courtsiding”, is a risk that can now be addressed using the TTaaS system developed for financial services. The live event can be timestamped to UTC, so that when a bet is placed afterward, but arrives before the TV signal, it can be clearly and traceably verified or denied with confidence in the same way as trades.
Transaction reports are more than a redundant regulatory requirement. They provide important protection for the firm that uses them, and they can be used in a variety of ways to detect market abuse both within one’s firm and from external traders. The growing demand for resilient timing is unsurprising. As we have seen a colossal shift to reliance on the digital sphere across 2020, the consolidation of digital security has only become vital. It is ultimately clear that regardless of what happens with MiFID II, transaction reporting is here to stay.
