Published On: Wed, Sep 10th, 2014

Assessing The Impact Of The HK SFC’s Electronic Trading Regulations

Zoltan Feledy, Director, Asia Pacific Execution Sales, Bank of America Merrill Lynch -

Zoltan Feledy, Director, Asia Pacific Execution Sales, Bank of America Merrill Lynch –

The Hong Kong Securities and Futures Commission’s regulations on electronic trading came into effect at the beginning of 2014. As the market was preparing to comply with the upcoming regulations, through our conversations with clients, we understood that some were reducing the size of their broker panels and asking us to limit their access to more advanced algorithms and highly customized solutions. At that time we took the view that the collective impact of these requests may potentially result in a less competitive landscape and may also stifle product innovation. With the benefit of hindsight, it now appears that these shifts were only temporary. A few months into the year, clients that previously requested a limited suite of algorithms were again asking us for new and innovative solutions, albeit in a far more controlled environment.

Q: What is your view on managing a broker panel under the regulation and its impact on product innovation?

Emma: Following the announcement of the rules and the reality of the administration burden on investment managers and their broker partners, we observed a decrease in the number of brokers they had on their panels. Now there is further clarity on the administrative requirements under the regulation, I believe investment managers will slowly and selectively increase their panels.

In my view, gone are the days where investment managers are willing to take every new algorithm that is offered to them. I think managers are and will continue to be very selective in their choice of algorithms. This may result in some stifling of innovation although I do think that it means that resources will be better deployed on developing those algorithms that are really needed and not building something and then hoping people use it.

The regulatory change required us to work closely with our clients, as both sides were required to meet their respective obligations. Throughout this process, dialogue remained vibrant and we found that as they performed their due diligence, the process brought us closer with each completed round of requests. Furthermore, as we worked on accommodating the diverse and increasingly sophisticated risk controls required by our clients, our systems and procedures became increasingly robust and customizable in the process.

Q: How have your relationship changed with the sell side and what are you hearing from your peers?

Emma: I believe our relationships have been strengthened through this process. Through the initial phase and the days that followed, we needed to rely on our broker partners and they needed to rely on us. We all needed to be confident in each other’s abilities and assurances.

Certainly one of the very positive impacts of the new regulation has been the collaboration that it inspired amongst market participants as each prepared to meet the new requirements. Numerous industry bodies joined forces to streamline the due diligence process that was required by users of electronic trading platforms to perform on their providers. The standard template developed as part of this collaborative process was widely used to help meet the requirements and has since become the focal point of further collaboration and standardization.

Q: What are your thoughts on how the industry handled complying with this landmark regulation and its impact on electronic trading?

Emma: It was extremely encouraging to see the industry come together to simplify and minimise the impact for all those affected by the regulations – the buy side, the sell side and vendors. In my experience, there have not been many occurences where I have seen this happen, and with this high level of success.

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