Timestamping Opportunities from the MiFID II Delay
It may be fanciful but you could almost hear the collective sigh of relief from the European financial markets. The European Commission was forced to once again extend the deadline for the implementation of MiFID II after it became clear that neither the competent authorities nor the market participants would have the necessary systems in place on time. But now that the industry has an extra year before implementation in January 2018, how much pressure does this actually relieve?
The market is still tackling arguably one of the biggest challenges posed by the new directive: the requirement for highly granular timestamping, using clocks that are synchronised across the whole industry. In particular, MiFID II mandates new levels of detail coupled with micro and millisecond accuracy. This is a real challenge for many in the market, but one that is worth solving not just for the benefit of MiFID II compliance but additionally for the highly granular data this provides. As we discussed in a previous post, timestamping offers unexpected benefits beyond compliance, empowering firms to accurately measure, and perhaps ultimately improve, their trading services. Rather than waiting another year to put these new systems in place we should act now as an industry to create one quick but highly significant win.
Now thinking logistically, how can we achieve this level of synchronization and transparency in practice?
We must begin with an accurate time source.
Article 50 of the related technical standard for MiFID states that timestamps must be traceable to Coordinated Universal Time (UTC). Existing GPS systems are able to fulfill this requirement and can be accurate to tens of nanoseconds, but it does have its drawbacks.
Firms who want to obtain UTC time via GPS can either build the solution themselves or buy it from their data center provider. Going the DIY route, GPS can be expensive, particularly for smaller firms. For those interested in a DIY solution, the capex alone can be cost-prohibitive, but to add on monthly costs for roof-rights at a data center for a new GPS antenna and riser from the roof to the equipment rack can make this option a non-starter for many, not to mention having the in-house expertise to support the system. Alternatively, firms can leverage some data centers who provide their own GPS service. Financially, this is a much more viable solution but because it is not in the core competencies of a data center, they typically do not offer Service Level Agreements and cannot support stringent requirements of the financial community.
As a stand-alone solution, either option above is unlikely to satisfy MiFID II regulatory requirements. GPS service systems can fall out of sync for several different reasons, including less reliable systems and receivers, but also signal blocking that may occur within the vicinity of the antenna, causing all subsequent timestamps to be incorrect until the error is recognised and remedied. Take a look at what happened on Jan 26th, for example. In such instances, firms relying on GPS alone for time synchronization would fail to meet the maximum 100-microsecond accuracy threshold required by the Directive.
Companies like Google and Yahoo obtain UTC time direct from NIST. Internet time sources are not subject to stringent regulation like financial services firms and therefore will not offer sufficient, if any, Service Level Agreements around things like drift from UTC. Likewise, internet time servers will not offer PTP. For these reasons, internet time will not be recognized as an accurate or sufficient time source under MiFID II.
Now that you understand the different options for sourcing accurate UTC time, it is important to note that as a stand alone solution, GPS will meet MiFID II requirements on drift although reporting can be another challenge. In our next post we’ll discuss the different options for integrating UTC time with your applications or network to provide alternatives to ensure a complete time synchronization solution.
This article was published in TabbForum 04/08/2016 http://tabbforum.com/opinions/keep-the-clocks-ticking-part-2-picking-a-time-source?ticket=ST-14743759479402-GBF1ej27nz2Hjq2DFG02cg7RTOL6Dvyrbl1mB6pg