With market participants already beleaguered by regulatory changes and with national governments’ tendency to resist EU tinkering in financial markets, Jeremy Taylor (Operational Processing and Derivatives specialist, GFT) believes that implementing the Markets in Financial Instruments Directive (MiFID) II is going to be a momentous struggle.
The increasing politicisation of MiFID II combined with its huge scope will make it an extremely difficult regulation to implement. Speaking in a recent interview with Banking Technology, Taylor highlighted some of the challenges that lie ahead.
“It surprises me to say this, but I actually feel sorry for the bureaucrats in Brussels. In the UK and in Germany, national politicians are quite protective against any perceived threat to their domestic industries. There’s a real issue lying ahead with open access to clearing services. Meanwhile, a lot of banks don’t fully realise that MIFID II is going to have a major impact on trade reporting.”
Taylor pointed to the prevalence of lobbying from EU member states as a key force impacting the execution of the regulation, citing Germany’s vigorous campaign against MiFID II’s provision of open access to clearing as a key example.“It’s highly political. Germany has been vocal in calling for the open clearing requirement to be watered down,”he stated.
The upcoming European Parliamentary elections could also have an impact on the outcome of the regulation. Taylor emphasised this; “One of the major concerns we have for MiFID II is that the EU elections may be contributing to the political baggage surrounding the directive. There are plenty of anti-bank politicians lobbying on a populist basis, and that makes for poor regulation.”
As well as the political issues plaguing MiFID II, there are also some fundamental challenges relating to the drafting of the legislation. In particular, the text states that all derivatives that are deemed to be ‘sufficiently liquid’ should be cleared through an approved exchange. However, it provides no definition of the phrase ‘sufficiently liquid.’ Confusion over definitions caused a great deal of commotion in the weeks leading up to the introduction of the European Market Infrastructure Regulation (EMIR) trade reporting mandate, and regulators will certainly need to resolve this issue if they wish to avoid a similar scenario with MiFID II.
The introduction of trade reporting under Dodd-Frank in the US and EMIR in Europe was no small feat, and both firms and the regulators learned a great deal from the process. MiFID II introduces even more stringent rules around trade reporting and both will need to apply the lessons learned if they are to meet the reporting demands.
“Banks were all relieved that the 12th February trade reporting deadline under EMIR has passed, but they haven’t realised that MiFID II is coming with new trade reporting rules that will have a huge investment impact. In EMIR you trade report on a T+1 basis. MiFID II will tighten that up to near real time, and it will specify what fields you have to use in reporting. That’s an extra layer of technology cost for banks to think about,” stressed Taylor.
A final lesson learned from the Dodd-Frank / EMIR experience is that regulations of this scale are often fiercely debated. It’s fair to assume that the European authorities will meet a great deal of resistance from firms and governments in the run up to MiFID II implementation and they will need to be prepared for this.
The above comments formed part of the ‘MiFID II faces a tough road ahead’ article published by Banking Technology on 8 May 2014.