Good News for Unready Firms: MiFID II Delayed

Shanny Basar

Only 10% of firms said they were “very ready” for MiFID II in a recent survey by consultancy and technology provider Sapient Global Markets as the incoming regulation covering European financial markets was delayed by one year.

The European Commission today proposed an extension to the application of MiFID II  to 3 January 2018. The commission said in a statement that the extension is “strictly limited” to what is necessary to allow the technical implementation work to be finalised.

In order to implement MiFID II, the European Securities and Markets Authority has to collect data from about 300 trading venues on about 15 million financial instruments. However Esma has said that neither national regulators or market participants will have the necessary systems ready by the original implementation date of 3 January 2017.

Jonathan Hill, commissioner for Financial Services, Financial Stability and Capital Markets Union, said in a statement: “Given the complexity of the technical challenges highlighted by Esma, it makes sense to extend the deadline for MiFID II. Meanwhile, we are pressing ahead with the level II legislation to implement MiFID II and expect to announce those measures shortly.”

Sapient Global Markets surveyed more than 500 participants in a recent MIFID II webinar and only 10% said they “very ready” for the new regulation, while 90% said they were “not ready” or just “somewhat ready.”

Cian O’ Braonain, director of the regulatory reporting practice at Sapient, said in an email: “It’s inevitable that whenever the word ‘delay’ or ‘postponement’ is used there’s a natural temptation to ease off and become complacent because they now have 24 months to complete the project. That’s incredibly dangerous because the extra time should be used to understand the complexity, the IT requirements and also for testing and re-testing to ensure reporting completeness and accuracy.”

 O’ Braonain also warned that lack of internal expertise or upfront analysis can cause firms to not seek the most efficient solutions. “That creates an environment of constant flux where manpower is pulled in different directions in order to desperately maintain tactical systems that struggle to keep pace with the depth and breadth MiFID II requires, let alone refinements to other regulations, such as European Market Infrastructure Regulation,” he added.

Scott Eaton, chief operating officer of MarketAxess Europe and Trax, said in an email that although it is reassuring to receive an official implementation date in 2018, there are still key aspects that the industry needs to complete preparations.

“We are still awaiting the Delegated Acts and the final Regulatory Technical Standards, which will then need to be approved by the Council and Parliament – a process which would take a minimum of three months,” Eaton added. “Optimistically, the industry will then have all of the necessary information to move forward with implementing the required systems to meet MiFID II compliance by June 2016.”

Christian Voigt, senior regulatory adviser at Fidessa, said in a blog that although the delay is a massive relief to many market participants and the regulators, it is also a missed opportunity.

“Brussels opted, again, to define a fixed deadline rather than a relative timeline (12 months after an event, for example),” Voigt added. “The recitals for the amending directive and regulation contain some far from subtle hints to Esma’s advice that the new deadline assumes the transpositions and the relevant technical standards are delivered by mid-2016. What if that does not happen? Let’s just hope we don’t have to find out.”

Tracey McDermott, acting chief executive of the Financial Conduct Authority said in a speech this month that the UK regulator shared Esma’s concerns around the practical implications of the original MiFID II timetable.

She said the area of MiFID II that has perhaps provoked the most discussion is the market structure and transparency reforms for bond and derivatives markets – which remain very uncertain. “As well as important interpretative issues around the operation of different types of trading venue, we are still waiting for the finalization of the technical standards dealing with pre and post-trade transparency,”, McDermott continued.

McDermott added that more transparency and, for certain derivatives, a requirement to trade on organised venues, should strengthen the price formation process and resilience of trading. She cites US data showing that the UK and European markets could be  more effective. Certain derivatives have had to be traded on a swap execution facility in the US since 2013 as part of the Dodd-Frank regulatory reform act.

She said the FCA has always insisted that there is a balance to be struck between transparency in support of price formation, and encouraging the provision of liquidity, although this is difficult.

“Arguments today abound that pre-crisis liquidity was illusory. Or at least driven to artificially high levels by the implicit subsidy of ‘too big to fail’. Everyone agrees that it tends to disappear, like a bad friend, when you need it most,” McDermott added. “Nonetheless, I think it would have been helpful if the framework legislation had allowed for the phasing in of the transparency regime.”

Esma has chosen to assess whether bonds are liquid using a quarterly assessment of quantitative liquidity criteria using an instrument-by-instrument approach (IBIA).

Amir Khwaja, chief executive of Clarus Financial Technology,  the analytics and research firm, said in a blog: “For a market with tens of thousands of securities, with high volumes in specific issues and a long tail for many others, this transparency will have a profound impact and be interesting to say the least.

National regulators are due to publish the results of their transparency calculations by December 1 2016  based on the reference period from August 1 to October 31.

McDermott said MiFID II transaction reporting is also on the FCA’s radar. “The need for accuracy and completeness of transaction reports, as MiFID II makes clear, is crucial and something we have focused on in our own supervisory work,” she added. “Having firms zeroed in on getting their transaction reporting right will be one of our key supervisory priorities, particularly when it comes to seeing how successfully they’re implementing the legislation.”

Greg Kenepp, president of Cloud9 Technologies, said in an email: “Retention for recordings is especially a big topic for financial firms right now, and banks will need to work diligently over the next two years to ensure that their call recording practices go above and beyond what is required by MiFID II.”

Featured image by Alphaspirit/Dollar Photo Club

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