After the European Commission’s decision last May to postpone the implementation date for the Markets in Financial Instruments Directive – aka MiFID II – we have just over a year to get our financial ducks in a row before January 2018. However, even in this short timeframe there is still a lack of clarity around the implementation of several requirements, a lack of strategy to tackle MiFID II compliance head on and various other unknowns concerning industry obstacles.
With some key market structures required to support the compliance framework still missing and an inability to determine what would be considered ‘good enough’ by the regulators on various multiple requirements, the setbacks for MiFID II keep coming. Regardless of any delays – either planned or unforeseen – the launch will happen and the market needs to be prepared.
MiFID II requirements will need to be addressed much sooner than the 1 January 2018 deadline and the next 12 months will be crucial to ensuring the market is ready. With all elements of MiFID II still to be considered, it’s clear that it won’t necessarily be a smooth journey to meeting the regulatory requirements. To understand how ready the market is for MiFID II, obstacles and issues need to be explored to ensure the industry is fully aware of the challenges it faces in the effort to comply.
Technology and regulation
From recent conversations, it’s clear that MiFID II readiness throughout the market is still inconsistent. Some companies have started implementation of specific solutions, others have reserved budgets and are looking to peer groups to begin implementation, while a section of the market remains far behind on preparations. However, with the changes needed in various trading models across asset classes, the need for new platforms, and evidently more and new technology needs arising – will they be suitable for the new requirements coming up over the next 13 months?
As an example, the timestamping regulations at this point in time are clearer because the market is already taking action familiar with the technology needed. However, when it comes to other aspects of the directive, such as algorithmic (algo) testing, the waters are more muddied. Whereas algo testing technology exists to provide firms with pass/fail testing and the audit-trailed evidence of algorithm stability; it’s unclear what level of testing will be required for MiFID II compliance.
The uncertainty and unpredictability around MiFID II regulations is putting the market in an awkward situation: if there is a risk that the technology will need to be updated or completely changed in a year’s time due to new rules – or new interpretations of existing rules – why would firms invest now? Moreover, what should they invest in to mitigate this risk?
Historically many firms have relied on their brokers or technology partners to provide technology for them, but MiFID II firmly places responsibility for compliance at the feet of the firm, not the supplier of regulatory solutions. Firms have a clear responsibility to ensure they are compliant; it’s no longer possible to rely on a supplier to make sure systems come up to scratch.
MiFID II shouldn’t just be about choosing new technology and guessing requirements; rather it should reflect a consistent approach to increase transparency and confidence in the marketplace. Without this, firms are simply picking technology in the dark, hoping that it complies with the eventual final regulations. Without the clarity from the European Securities and Markets Authority (ESMA), there’s no clear definition of what the right technology is or what is acceptable behaviour and what isn’t.
Despite this lack of clarity, the January 2018 deadline appears to be immovable – meaning that the marker must take steps to become compliant. While many are understandably focusing on areas of the regulatory changes that are of most importance to their business, the changing landscape of Europe post-Brexit also needs to be considered by all markets around the world when coming up with a solution for MiFID II.
Global and European firms will need to take several different considerations into account as there are differing factors between regions and markets. With Brexit in mind, one important aspect that firms are looking at is the issue of passporting. Recent UK press coverage, including a report in The Guardian, has highlighted the significant risk that UK based firms will encounter if passporting rights are lost after Brexit. Passporting allows UK authorised firms, banks and fund managers to conduct business in the 27 other European Union (EU) states. As the UK gears up to leave the EU, and passporting rights applying to the single market regulations, British companies are in severe danger of losing these passporting rights.
As the Brexit situation in Europe is still not resolved, the arrival of MiFID II and the plans for Britain’s exit are something of a juxtaposition. MiFID II will come into force at least a year before Brexit happens – even in the quickest Brexit scenario – so some argue that it’s best to find a solution for MiFID II requirements and then resolve whatever comes out of the Brexit discussion.
This is especially pertinent with the latest uncertainty impacting Brexit. On top of having to foretell of Brexit’s implication, firms also need to ensure their regulatory solutions in one region do not put them at odds with other regulatory regimes. Having to come up with a globally consistent response to regulation without overburdening the firms with unnecessary duplicate spend is becoming every day more challenging.
Not all doom and gloom
Despite the scare stories, MiFID II has the potential to create completely new ways of working, in much the same way as MiFID I brought about lower execution costs and competition between venues. We’re already seeing high frequency trading (HFT) firms begin to provide agency brokerage services to larger trading outfits motivated by best execution requirements in the regulations. While it’s natural for the market to fear change, it’s also natural for change to present opportunities.
Anecdotal evidence shows the disconnect in the market: some say that constant changes and tinkering from ESMA needs to stop, while others believe that there is a general feeling that participants and providers need only stay calm and trade on new opportunities that present themselves. Everybody will always have their own opinions, but something that is for sure is that the 2018 deadline is closer than we think. Whether anecdotal evidence is correct on one side or the other, expectations and clarification needs to be set by ESMA.
The solutions required for compliance are not quick fixes. They will impact many aspects of the trading work flows across the industry and across a wide set of asset classes. To minimise the chance of fines – or worse – participants need to move to the implementation stage as soon as possible. This shouldn’t be a waiting game.
The implementation date might still be over 12 months away, but firms that begin early in preparing for the EU’s updated Market in Financial Instruments Directive (MiFID II) can potentially win significant derivatives trading market share.
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