An industry-wide gap has opened up between new regulatory requirements and current trading infrastructure capabilities in a fragmented market. Today, there are 260 European securities execution venues and 35 of them trade the 1,000 most liquid stocks. In practice, connecting to all of them may not be an option, but getting the best deals and prices and monitoring that deals are done in the clients’ best interests will be ever more important to retain or gain customers and keep regulators at bay.

PJ Di Giammarino CEO JWG-IT Group Ltd

At JWG-IT’s recent (15 April 2008) London FORUM, representatives from 30 financial institutions acknowledged that they will be challenged to prove their best execution policies were followed. The majority do not believe the board is aware of the imminent risk of a challenge from the corporate customer (the primary threat) or regulator.

At the FORUM, our Technical Special Interest Group (TechSIG) demonstrated its capabilities with collaborative solutions to liquidity search, record keeping and trade reporting exhibited by combinations of its 30+ member base including Aleri, BEA Systems, Business Objects, Cisco, Copan, EMC, FRSGlobal, GemaTech, Intel, SGI and Sybase.

The FSA has made its point by imposing the first jumbo fine of £900,000 for careless record keeping, citing it as a “serious failing … even where the FSA has not determined that the firm mis-sold subprime mortgages and there have been few complaints.” Clearly the regulators do not see their investments over the last few years as meaningless and they will now be entering a period of selective and prudent investigation. Maybe the financial penalties will not hurt, but the damage to reputational risk of a trading business in a fragile market undergoing structural change is a clear danger.

EU regulators, though their “principles based approach”, are calling on financial institutions to define industry best-practices and avoid ‘di minimis’ solutions which do not provide transparency to protect European customers. To get it right, a balanced view of the risks and the appropriate investments must be agreed by the businesses and their project managers, the Chief Risk Officer and the technology / operations teams. Priorities must be set and plans established which leverage the “run the bank” team’s ability to use new platforms and operating models to change the bank. Smart order routing, rules-based technology, enterprise data management, monitoring systems and balanced scorecards are just some of the tools required to free up the capacity required.

The board’s challenge is straightforward. Deploy the right operating model and you maintain your edge; get it wrong and your costs and operational risk profile explode and more regulatory hurdles will be established. Cooperation across Europe is required to get an agreed league table of priorities. Under the auspices of JWG-IT, over 200 sell-side, buy¬side and market infrastructure practitioners started this process in London and the debate will continue at the Frankfurt FORUM on 16 June, to be followed by Milan and Paris later in 2008. New research will form the basis of the discussion, allowing delegates to benchmark their views via anonymous voting. Don’t miss the German market’s views on 16 June.

www.regonline.com/jwg-it-FORUM¬FRANKFURT

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Filed under: Issue 5 - Summer 08, Risk