MiFID II Still Tops Regulatory Agenda

Shanny Basar

MiFID II remains the headline topic in regulation despite a possible delay in implementing the new rules covering European financial markets according to Jake Green, partner in the financial regulatory group within the corporate practice at law firm Ashurst in London.

Green told Markets Media: “Some buyside clients are holding back preparations while they wait for sellside solutions. Sellside preparations have ramped up and if anything the pace is increasing. There is no sense of a slowdown but there is a bit less panic.”

The legislative text says MiFID II is due to come into force in January 2017 but the European Securities and Markets Authority has asked for a delay of one year. The regulator’s request has to be approved by both the European Parliament and Council, which could happen this month.

Steven Maijoor, chair of the Esma, said in a speech last month that to define liquid bonds the regulator needs to obtain transaction data and reference data for each instrument before the number-crunching can even start and the same applies to other asset classes.

“Investment firms, trading venues and supervisors need to rebuild their transaction and reference data reporting systems almost from scratch,” Maijoor added. “We will be well into 2016 before the rules are final and the building of these IT systems, which will take at least a year, can really only start when these rules are set in stone. There are similar data and IT issues with the transaction and position reporting requirements in MiFID II.”

Green said other incoming regulations this year, apart from MiFID II, include the Senior Managers and Certification Regime (SM&CR) and the Market Abuse Regulation.

From 7 March 2016 financial regulators can fine or sanction senior bankers for misconduct that occurs in their areas of responsibility. The strengthened market abuse directive for inside dealing and market manipulation will come into effect from 3 July 2016.

Law firm Davis Polk & Wardwell said in a briefing note: “Compared with the implementation process for previous EU Regulations, the FCA has taken a relatively robust approach to retaining elements of the existing UK regime as guidance in an effort to be helpful to corporate finance market participants. That said, the introduction of MAR represents a major change in the scale, application and detail of the market abuse regime. Issuers and their advisers will have to adapt to a regime where both UK guidance and detailed EU legislation will need to be understood and complied with going forward.”

In addition last month the European Banking Authority published final guidelines on remuneration policies and delayed implementation so that the rules will first apply to the 2017 performance year rather than 2016. However the EBS also concluded that the bonus cap should apply to all firms within the scope of the Capital Requirements Directive regardless of size while the UK had said the rules would not apply to smaller asset managers and brokers. The UK has always opposed the European regulation which limits bonuses for senior staff to 100% of salary or 200% if shareholders approve.

“The elephant in the room is the EBA remuneration decision in December which is creating a lot of talk,” said Green. “This could cause major restructuring of some businesses so certain activities fall outside the scope of the policy.”

Before MiFID II is implemented, the European Market Infrastructure Regulation may also require mandatory clearing for certain standardised over-the-counter derivatives from April 2016.

Nicholas Chaudhry, head of OTC client clearing, market services, Commerzbank Corporates & Markets, said in a report at the end of last year that firms will have to be a clearing member on one of the 16 authorised EU central counterparties or outsource to a clearing member to meet the Emir clearing mandate. If firms use a CCP that has not been recognised under Emir they will face larger capital requirements.

Chaudhry said one of the biggest infrastructure challenges is that electronic derivative transactions need to be submitted to a CCP within 10 seconds of execution and that CCPs have accept or reject a derivative within 10 seconds of submission.

“Whist it’s accepted that the majority of exchange traded transactions currently meet, or nearly meet these requirements, the infrastructure changes needed to guarantee that all exchange traded transactions achieve these requirements are substantial,” he added.

Chaudhry warned that enforcing these tight timeframes will increase costs, which are likely to passed to end-users in the form of higher bid-offer spreads. Costs will also rise due to the requirement for large sellside firms to exchange margin from September 2016 – before large buyside firms are affected in 2017 – which will increase the demand for high quality collateral.

He said that market infrastructure regulation has been developed independently of the Basel capital requirement directive (CRD IV) and in particular the basis for calculation of the leverage ratio.

“Restrictions on netting of contract positions mean that banks that act as general clearing members for their clients’ exchange-traded and OTC derivatives transactions face substantially increased capital requirements to avoid breaching the 3% ratio limit,” said Chaudhry. “The US has already seen the number of clearing members in the US decline as participation in central clearing becomes uneconomic.”

Chaudhry added that although MiFID II may be two years from implementation, firms need to start formulating a strategy and lining up third-party providers to deliver the market connectivity and support services that will enable activity to continue compliantly and cost-effectively.

Featured image by Rawpixel/Dollar Photo Club

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