Is your brokerage technology stable? UK government looks at high penalties for institutional IT failures

The British government is now looking at fining financial markets firms and banks for unreliable IT systems. We have had the execution and reporting overhauls, now here comes the system reliability scrutiny hence brokers need to check that their solution is up to the job

During the past few years, some of the most well recognized financial markets regulatory authorities in important regions for the FX industry have turned their attention purely to the OTC derivatives product range that most retail FX brokerages offer.

There has been some infrastructure related bureaucracy, largely centered around the MiFID II directive in Europe which was set out in order to provide a standardized system by which brokerages, exchanges and market makers have to record trade information, report trades to competent authorities and perhaps most importantly, demonstrate how execution was handled for each completed trade.

What has not been looked at so far is the extent of the quality and reliability of the technology solutions used by brokerages, as the focus has been purely on product revision – for example leverage restrictions on CFDs, or how certain types of retail trading are advertised and marketed – and on trade reporting and transparency.

Now, however, despite its gray suited lack of understanding of the architecture of financial systems, Britain’s Financial Conduct Authority (FCA) is considering taking a very harsh stance on system errors or technology failures that have a potential or proven effect on customers.

Unlike the Australian regulator ASIC, or the NFA in North America, the FCA is relatively hands-off, and doesn’t have powers to prosecute companies for transgressions, instead being purely an organization that determines and maintains the criteria that companies need to keep to, and if something goes wrong there is the Ombudsman or civil court.

As a result, ASIC and NFA are far more technologically aware and have a very detailed understanding of the topography of the retail and institutional FX, CFD and listed derivatives sectors, and have electronic systems for monitoring and reporting that are a direct read-across from brokerage systems.

In the UK, things are somewhat different. Despite London being the absolute world superpower in terms of financial markets and the development and maintenance of technology that goes with it, the regulator, apart from allowing developers to have a free environment to develop new systems which it calls the “Regulatory Sandbox”, is a relative Luddite.

It only takes a brief look at the incredible level of development that the UK has undergone over the past 20 years in terms of financial technology infrastructure. It leads the world by a very long way, and the systems support the largest financial institutions in the world, who in turn have their own massively IT intensive establishments that rely on in house and external partners.

The hosting and colocation industry is huge in England, with Equinix’s LD4 venue in Slough being the world’s reference point in terms of the handling of trade data for the entire global financial markets ecosystem, and data is distributed via many channels including approximately 8,000 miles of fiber optic cables which emerge from the seas around the UK at locations such as Crooklets Beach and Sennen Cove in Cornwall, and Highbridge in Somerset.

These cables carry data not only across the UK but to its continental neighbors, and whilst the European Central Bank is correct in suggesting that the majority of Europe’s critical infrastructure for trading FX, as well as shares and derivatives, is clustered in a 30-mile radius around the City of London, and that regardless of the UK’s future, some of the industry’s biggest data center operators, which host banks and high-frequency traders’ IT equipment, have announced capacity increases this year to cope with rising demand from investors in both Asia and the US, the real reason is not just infrastructural, it is really around why that level of infrastructure exists only in Britain and not elsewhere in Europe.

Britain’s interbank sector is responsible for 49% of all global FX order flow at Tier 1 level, and consists of British and international banks based in London, marking out London as a true free market, with no controls on which banks and non-bank entities (Thomson Reuters, Currenex, Hotspot all have centers in London) operate there, yet that is the de facto center for electronic trading and always will be.

Given this level of dominance, the British government is now beginning to catch up and bear down on firms whose IT infrastructure creates havoc for clients.

As is perhaps to be expected, the FCA did not take this stance at all, however a report released just a few hours ago by the UK Parliament’s Treasury Select Committee (TSC) has stated that bigger levies on the financial sector could be used to ensure that the FCA has the resources to tackle the issue after it branded institutional IT failures as “unacceptable.”

Perhaps one of the triggers that caused the government to react in this way is the TSB Bank system failure which blocked several thousand retail customers from accessing their accounts and cost the bank over £330 million to rectify.

However, if the FCA is going to get involved in this, it could well mean that brokerages based in the UK would be under the microscope in terms of how their infrastructure can be kept as unitary and as reliable as possible.

This is likely to be much easier to manage for companies such as CMC Markets, which has invested tremendously in its own Next Generation trading platform, its own servers and in house infrastructure, however for those using third party platforms,  a significant level of deliverables would likely be required in the maintenance contract to ensure that there is recourse if a CRM, platform, hosting or execution failure occurred and the regulators came knocking.

Steve Baker, the Treasury Committee’s lead member for the inquiry, stated: “The number of IT failures that have occurred in the financial services sector, including TSB, Visa and Barclays, and the harm caused to consumers is unacceptable.”

“The regulators must take action to improve the operational resilience of financial services sector firms.” he said.

“They should increase the financial sector levies if greater resources are required, ensure individuals and firms are held to account for their role in IT failures, and ensure that firms resolve customer complaints and award compensation quickly.”

“Regulators must have teeth and be seen to have teeth,” the Treasury Select Committee said.

Financial services trade body UK Finance stated “The industry conducts sector-wide exercises with regulators to ensure it is prepared to respond effectively to any major disruptions or events as part of its continued commitment to maintaining the resilience of the financial system.”

So yes, it does appear that the reliability of the technological infrastructure itself, not just how trades are executed on a fully functioning system, will be part of the regulatory mandate soon, hence slippage, CRM outages, leaking of customer data (or worse!) and system issues that keep trades open and interfere with execution or margin are no longer something to blame ‘the markets’ for.





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