Europe Strikes Regulatory Balance

Terry Flanagan

Use of Regulations and Directives provide flexibility in implementation.

The division of financial reforms in Europe between regulations and directives is likely to become a permanent fixture as legislators try to strike a balance between overly prescriptive and overly lax implementations.

“This direction of travel towards outcomes-based Regulations as opposed to principles-based Directives has been applied to measures such as the Capital Requirements Regulation/Directive (CRR/CRD III & IV) as well as the market abuse measures (MAR/MAD II),” Anthony Kirby, chair of ISITC-Europe Regulatory Group, told Markets Media.

“This is partly in view of the highly exacting time pressure to effect so many regulatory changes over the coming year, and also to deliver more stringent and prescriptive rule-making with limited opportunity for “gold plating” divergent interpretation and late transposition of EU legislation by national regulators and/or governments,” Kirby said.

The MiFID legislative package comes in two parts:

– A Regulation (MiFIR) which creates requirements in relation to the disclosure of trade transparency data to the public and transaction data to competent authorities, the authorization and ongoing obligations applicable to providers of data services, the mandatory trading of derivatives on organized venues, and specific supervisory actions regarding financial instruments and positions in derivatives.

– A Directive (MIFID II) which amends specific requirements regarding the provision of investment services, the scope of exemptions from the current Directive, organizational and conduct of business requirements for investment firms, organizational requirements for trading venues, powers available to competent authorities, sanctions, and rules applicable to 3rd country firms.

The European Commission has examined the various regulatory measures under MiFID II, including the market structure, ETF and non-equity (including OTC derivative and commodity) transparency, requirements relating to the recording of orders received or transmitted by telephone conversations and electronic communications, quality of execution data, and investor protection.

Level 2 implementation of MiFID/MiFIR and European Market Infrastructure Regulation (EMIR) is unlikely to be achieved by the end of 2012, however.

“It’s unlikely that they will be realized at the detailed implementing measures level, partly in view of the deadlines but partly also in view of the serious risk consequences of getting this wrong,” Kirby said.

The Dodd-Frank Title VII measures and in Europe (EMIR measures) for OTC derivative trading and clearing are controversial.

“Both the DF Title VII and EMIR measures, for example, could in principle be applied from the end of 2012 as direct-effect regulations, short of agreeing the detailed implementing measures to satisfy political considerations in the U.S., or with little or no allowance for Member State transposition into national laws in the EU/EEA,” Kirby said.

However, despite the pace of applying self-actuating principles in the US, there are some delays with rule-making under the CFTC, “and therefore there is still much to agree in important areas such as capital and margin provision before either set of measures can take effect in practice,” he said.

There is a need for congruence between applying the principles of EMIR vs. MiFID II in Europe, plus a need to ensure a consistent treatment of third-country firms (i.e. firms not domiciled in a EU/EEA country). In terms of the state of preparation in the EU/EEA, it is likely that MiFID II will take effect from the second quarter of 2014.

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