How to tackle the management of Authorised Trader Lists under MiFID II
What are the challenges of managing Authorised Trader Lists (ATLs)? Here is a quick guide on how to tackle the management of ATLs under MiFID II.
The goal of the MiFID II EU legislation is to provide more transparency over financial trading by introducing measures aiming to reduce (or eliminate) any foul play and to protect against algorithmic trading (computer-generated trades) going crazy and artificially influencing the markets.
One such measure is the monitoring of the personnel who are authorised to trade. This means that where appropriate the name of each authorised trader has to be assigned and ‘documented’ against each trade.
Thus, every organisation that carries out trading activities needs to maintain a formal register of traders who are authorised to trade on behalf of that organisation.
Furthermore, these organisations that trade need to share their list of authorised traders with every organisation that they trade with. This way each buyer and seller can report on each transaction detailing who the individuals were, who agreed the trade.
All makes sense, but what is the process for managing this?
Currently, many financial organisations maintain this Authorised Trader List on paper and distribute it by emailing scanned copies (PDFs) to their trading counterparts.
This process, however, raises a number of questions:
1. What happens when a trader leaves the organisation or a new one starts?
The list gets revised, re-papered, re-scanned and re-distributed to all the trading counterparts. This is rather laborious, especially in large organisations where changes are frequent.
2. How are versions guaranteed to be the latest and up-to-date?
When receiving new versions, by email, it’s very difficult to know if that is indeed the latest version.
3. How do traders easily get access to each of their counterparts’ Authorised Trader Lists, to ensure they are trading with someone they should be?
Needing to use scanned copies of non-standardised lists, traders might struggle to keep track of all the authorised traders in various organisations they trade with.
4. What happens if there’s a dispute and requirement to retrospectively identify whether a trader was authorised to trade at a particular time?
This can’t be easily identified and may take valuable time and resources to prove the trader was authorised. The existing process doesn’t, by default, maintain a historical record of all changes made.
5. How about all those third parties who need to update their authorised trader lists individually with all their trading counterparts?
The existing process seems to be a major challenge for them as multiple data ‘keying’ and updating takes a lot of time and resources and is prone to errors.
There should be a better way…
One way to remediate many of these aforementioned challenges is for each organisation to dictate their own process. In this way, they’ll be able to maintain their own database of third-party Authorised Trader Lists and/or have a standardised form for their trader counterparts to complete. However, the effectiveness of this approach heavily depends on counterparts’ reliability to inform them when changes occur. Many organisations do this and their forms can be easily found by just searching on the internet.
It would be much better for everyone if a shared database was used, where all trading organisations can:
update their trader lists,
share data with whomever they want,
have one single source of the truth,
immediately access the latest file version,
provide a historical record of all changes made,
have a sufficiently standardised process that doesn’t depend on manual file management and distribution.
So, what happens if financial institutions fail to adhere to the MiFID II regulation?
From what we’ve seen in recent years, they get penalised with rather large fines. For example, in 2018 the FCA fined Santander nearly GBP 33 Million for breaches related to governance, unfair treatment to customers and more.
This is a process that can hugely benefit from using blockchain technology. And for some organisations this is already a reality.
At Cygnetise, we’ve used this and created the one and only signatory management application on the blockchain that is beyond proof-of-concept and is currently being used by financial organisations across the globe.
Using Cygnetise’s signatory management application, companies can remove all pain points associated with managing traders’ lists, while reducing the risks of getting penalties from the regulators.