MiFID II Clock Synchronisation: Start of a Global Trend?

MiFID II Clock Synchronisation: Start of a Global ...


MiFID II Clock Synchronisation: Start of a Global Trend?

by Stuart English
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MiFID II Clock Synchronisation: Start of a Global Trend?

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MiFID II sees the introduction of strict regulations for European market participants to synchronise business clocks and to record the date and time of business events to Coordinated Universal Time (UTC). Will other global regulators follow suit? Could there be a regulatory demand for a similar approach globally with the aim of all trading being stamped accurately to UTC in the future?

ESMA has drafted regulatory technical standards specifying the level of accuracy to be adhered to. This includes the maximum divergence from UTC and granularity. Depending on the participant’s trading activity category, this can vary from 100 microseconds (µs) maximum divergence and 1 microsecond granularity for high frequency traders, to 1 second divergence and granularity for voice trading. So what are the drivers behind this?

To understand the drivers behind the MiFID II Clock synchronisation obligations, we must look at the regulatory challenges that emerged during the evolution of electronic and high frequency trading. Cross-venue monitoring for market abuse and a reliable consolidated tape for post-trade transparency need to be able to support trading rates approaching hundreds of thousands, if not millions, of orders per second. As a result, timestamp accuracy prescribed by ESMA is a necessity in achieving a coordinated audit trail.

Europe is not the first to mandate clock synchronisation to a common source but are the first to mandate UTC. FINRA has published an OATS Reporting Technical Specifications stipulating that system clocks must be synchronised to the National Institute of Standards and Technology (NIST) in local time. In a recent conference organised by the National Physics Laboratory (NPL), discussing the effective delivery of UTC to financial markets across the globe, there were international bodies in attendance including the Singapore Metrology Centre whom are the national measurement centre for Singapore. It is not a stretch to see regulators in all parts of the globe wanting to tie together trading patterns. It would not be a surprise if progressive regulators such as the Monetary Authority of Singapore (MAS) were to mandate a certifiable time source for time stamping trading events in future.

There is a parallel here with the ESMA definition in MiFID II for High Frequency Trading. Some have been surprised that ESMA has a numerical threshold above which it considers business activities as being HFT (two messages per second for an instrument on average across a twelve-month period traded on a venue, or four messages per second as the same average for all instruments traded on a venue, with both thresholds excluding all client related flow). It is an experiment that is being watched with interest on the other side of the Atlantic. If successful, it could be adopted elsewhere.

Returning to MiFID II Clock Synchronisation and its potentially global impact, by the nature of the European markets and their local time differences, ESMA had no choice but use the reference time of UTC. However, the re-baselining of clocks to UTC may now allow other global regulators to follow suit, which in turn, could see the introduction of global financial market policing to use a common clock. The NPL believe this to be the case:

“We do believe that other regulators will eventually specify UTC because that would offer a very consistent approach across the global financial sector, which is no longer a national affair.”

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