The chief of the CFTC pronounced from Japan this week that implementing regulatory reform means overcoming “legal traditions, regulatory philosophies, political processes, and market concerns”. Looking at the global trading regulatory climate that surrounds MiFID II, we couldn’t agree more.
Those struggling to digest the MiFID II texts and get to Paris for the hearing next month are very busy getting their heads around how to get from where they are now to full implementation by 3 January 2017. Part of that equation must, of course, include the full international picture.
Keeping the full regulatory trading agenda firmly in your sights is critical in the global marketplace. Looking at the rest of the globe, there are quite a few areas where MiFID requirements will likely be affected by other regulatory initiatives. Here’s a quick recap of recent developments.
In September, the Financial Stability Board published their Fifth Implementation Progress Report of the G20 Data Gaps Initiative. The initiative was launched in the aftermath of the crisis to improve financial data globally, in order to, amongst other things, allow more effective assessment and intervention from regulators. Whilst the report is insistent that “significant progress has been made in implementing the DGI recommendations”, it is also clear that there remains huge scope for improvement of datasets in the G20, and the extent to which these improvements are made could be crucial in regulators being able to spot the next crisis before it happens.
While the President has presented a robust defence of Dodd-Frank so far, one big change to where banks have to book their derivatives did manage to sneak through in December.
In October the Financial Stability Oversight Council (FSOC), established by the Dodd-Frank Act to respond to emerging threats to US financial stability, has been coming under fire from the US Government Accountability Office (GAO). The suggestion that “FSOC still lacks a comprehensive, systematic approach to identify emerging threats to financial stability” is a pretty damning one, given their remit, but they may well feel that they are being criticised for failing to achieve the impossible. Only time will tell if the GAO can be appeased and, indeed more pertinently, whether FSOC can actually “identify emerging threats to financial stability”.
Meanwhile, the Securities and Exchange Commission (SEC) have announced a ‘Pilot Plan to Assess Stock Market Tick Size Impact for Smaller Companies’, in a move that has echoes of ESMA’s proposals to set minimum tick sizes across exchanges in the EU under MiFID II. The SEC plan is, admittedly, less ambitious in scope, being aimed only at “certain stocks with smaller capitalization”.
In the UK, banks will have submitted preliminary plans to the PRA for the new ringfencing regime on 6 January. These new rules are part of the G20 plan to end “too big to fail”. Meanwhile, the FCA is pressing ahead with their review of best execution practices, having stated that “most firms are not doing enough to deliver best execution”. The FCA are attempting to front-run MiFID II requirements in this area by asking firms to rethink their policies sooner than the European Securities and Markets Authority (ESMA) will require.
However, perhaps the most significant recent regulatory development in the UK has gone rather under the radar. During the summer, the FCA and PRA jointly published ‘Strengthening Accountability in Banking: a new regulatory framework for individuals’. The FCA and PRA are proposing some fundamental changes to regulatory accountability that are sure to be a cause for significant concern to senior managers in financial institutions struggling under the weight of ever mounting regulatory pressure. They are proposing a ‘Senior Managers Regime’ which will require firms to allocate a specific range of responsibilities to designated individuals – the headline being that these individuals can be held accountable if their firm contravenes a requirement within their area of responsibility. And yes, by ‘accountable’, they do mean potentially criminally liable.
If the current state of trade reporting doesn’t improve, then the first to be fitted up could well be senior managers responsible for the accuracy of such reports. In both the EU and the US, the data quality and collection problems that have been dogging OTC trade reporting continue to be major talking points.
Europe is still basking in the Christmas regulatory spirit of the 4,000 page gift which arrived at the end of the year from EU regulatory institutions. Particularly relevant for the markets is the new ESMA consultation paper on EMIR trade reporting, responses to which are due by 13 February. Also worth noting in terms of developments around EMIR; as part of an initiative to improve data quality from 1 December, trade repositories are be required to reject submissions where certain reportable fields have not been supplied.
The Investment Industry Regulatory Organization of Canada (IIROC) has become one of the latest national authorities to jump on the bandwagon and focus on tighter control of HFT, following in the footsteps of the EU and US as we discussed in last quarter’s digest. IIROC has announced that it has tasked four academic teams to study the impact of HFT, the last of which was announced on 17 October and will focus on equity markets. The team will examine the “impact of the dark liquidity rules” and “liquidity provision and market making by high frequency traders”. Their work is expected to be published by June 2015.
Finally, moving to Asia, the Japanese, not to be outdone by the Canadians, are also now indicating that they are ready to follow the US and EU and tackle HFT. In his keynote speech at the 2014 WFE General Assembly and Annual Meeting, Masamichi Kono of the Financial Services Agency of Japan, the banking, securities and exchange regulator, made a point of going after HFT. He said that HFT-related “malfunctioning of trading and reporting systems have caused great concerns among participants and the general public” and went on to say that regulators must “be ready to intervene when needed, on a proactive and forward-looking basis”. Watch this space.
All corners of the industry will be affected, not only by MiFID II, but also by up to 50 different regulatory initiatives between now and 2018. The buy-side, sell-side and market infrastructure people are still considering how they will react. What we know from experience is that no two firms’ implementations will be the same.
Like we saw with OTC reform last year, it will be nearly impossible to get all of it ‘right’. But you can plan now to be more successful than your peers and keep your firm from being perceived to be ‘off-standard’ or ‘relatively red’ in the eyes of your customers and regulators.
We are running a full trading regulation programme this year, through training and peer-to-peer benchmarking, while our RegDelta analysis tools can help firms and their suppliers to cope.
Stay tuned for our perspectives later this month and get in touch with the team now if you would like to join in the path to safety.