MiFID II and Derivatives: The Next Big Bang

European exchange traded derivatives markets have been ripe for competition for some time. Yet there exists a barrier that new entrants have, until now, failed to overcome – the vertical silo operating model. However, newly finalised text within the Markets in Financial instruments Regulation (MiFIR), and revised text in the Markets in Financial Instruments Directive (MiFID II) suggest the stranglehold exchange operators currently enjoy is set to be opened to competition. Although incumbents will no doubt look to fend off any threats to their business, and caveats still exist that will grant some exchanges exemptions based on their size, the spirit of the regulation suggests significant potential for market structure change. In order to reap the benefits of an evolving market structure – namely reduced trading costs, more efficient use of trading capital and more profitable trading strategies – firms will need to make significant investments to make sure their trading systems are fit for purpose.

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Given the data-intensive nature of derivatives markets and the potential for significant further expansions in data volumes resulting from competition, existing applications and infrastructure will need to be carefully evaluated to identify critical risk factors that could impact availability and performance.

Managing systems capacity will be crucial, as too will identifying any functional gaps in trading systems architecture, and finding the right solutions – either vendorprovided or in-house developed – to fill those gaps.

Similarly, although MiFIR and MiFID II include provisions to control risks in high frequency and algorithmic trading, a competitive exchange landscape will also place more emphasis on latency sensitive strategies – from market making to statistical arbitrage – requiring firms to evaluate all aspects that contribute to latency to avoid being disadvantaged.

While it is still not known what the European exchange traded derivatives market will look like in ten years, one thing is almost a foregone conclusion: there is significant change afoot, and firms that react most adeptly to those changes stand to gain the most. Strong project management skills will therefore be required to co-ordinate resources from across an organisation – including business, application and infrastructure owners – to make sure the right technology solutions are delivered at the right time.

This paper will explore:

  • Explanation of key drivers for competition in European ETD markets
  • Key provisions within MiFID II that are set to change the structure of European ETD markets
  • The IT implications of a more fragmented market structure, including exchange connectivity, market data, co-location hosting strategies, trading systems, transaction cost analysis and post-trade processes

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