We learnt something this month. The reason Europe calls it a regulatory ‘hearing’ is that it is an opportunity to hear views from both regulators and the market. Of course, that’s just part of the experience as many other senses are triggered when 400 people are locked in a basement for 2 days, deprived of connectivity, food and caffeine, while turning 844 pages.
So what did we hear and, more importantly, what is going to happen next?
As we’ve known for some time, MiFID II is massive. With the press from Paris and the consultation response drafts making the rounds, some of the unknowns are becoming known, but there are many different sides on this battlefield and we’re really just getting started.
This means that most are being very cagy about what they say and, until they see what is submitted, won’t know where the real issues lie until the next round – which ends when the final draft regulatory technical standards are sent to the European Commission on 3 July 2015.
If this hearing was the first public engagement, then we’d have to call it a gentle skirmish. We haven’t yet started debating the proposed approaches to meeting the will of the European people; rather we were just exchanging views and working towards having an excellent set of papers for the EC in Q1 2015.
Kind of like two armies having a walk around the perimeter … being respectful of one another but mostly keeping their arms lowered and the tone civil. But this won’t last long … and what will it be like later?
The battle ahead
All were keenly aware that, in order to comply with ESMA’s views, it would take far longer and cost far more than anyone would like to admit. The nature of the current battle is, therefore, keep expectations low rather than set them to a standard that will please the public.
Paris was a chance for some well-rehearsed objections to be aired. Clients won’t like it. This will cost too much. You don’t know what you’re doing with the data. Any real regulatory junkie could make these arguments standing on their head whilst eating a baguette – even if there isn’t any budget for coffee.
The real question is, will anyone do anything differently when the arguments are written down? Of course, the trade associations will make the plays they are paid to make but, at the end of the day, as was made quite clear by the regulators a few times over the two days, they will be free to take their mandate where they like.
Frankly, we just have to see whether the industry can make a dent in the well laid plans after the first real set of industry feedback goes in on 1 August. Ergo, September to December is when we move beyond skirmishing. We will share a few observations about what the likely outcome of some of this skirmishing is with our members at this week’s CDMG microstructural controls deep dive, so please get in touch if you’d like to come along.
However, there are a few big themes we can highlight now about the shape of the battle to come:
- A war of words and deltas. The MiFID II conversation has become far more detailed and far more prescriptive at this early stage than the framers of MIFID I could ever have imagined. The ISD, which MiFID I replaced, was fewer than 20 pages. MiFID I weighed in at a total of 4,300 at the end of the day. Now that we have seen the intensity of ESMA’s ticking and tying every subarticle and recital into a prescriptive framework, we fear MiFID II will come in at 25,000 pages when all is said and done. Say what you’d like about principles versus prescription, whatever the question, it will need to be answered and the differences that this answer implies will reflect the size of your change programme and impact on your business. As ever, the devil is in the delta – both between MiFID I and II and between MiFID II and other regulatory efforts. A number of terms like ‘liquid’ and ‘economic’ are being used in different places to refer to different concepts – so pay attention!
- A war of numbers. In a breakdown that would make Baron Lamfalussy cry, it is clear that ESMA don’t have much of the data they need to make reasoned policy judgements. Effectively, the industry is now being asked to do the work that should have been done by the politicians. Undeterred, ESMA have thrown spaghetti at a wall to see what sticks – liquidity, caps, pricing levels, IT costs, tick data and other key decisions have been justified with some high level numbers and still there is a plead to the industry to send more. However, we need to be very careful with what data is fired in as it could be used for many different purposes other than those intended. As in most battles, intelligence could carry the day …
- A war of reporting. We were impressed by the transaction reporting team’s conviction and the solidity of both their argument and actions. They will not accept excuses about clients not providing data (thanks, AMLD III) AND they claim to be building a reference data repository now. That said, the reporting perimeter is very confused as we discuss REMIT, EMIR, MIFID I and MIFID II all in one breath. The time to engage is now and the way to engage is through writing down your use cases, challenges and justification for your point of view (ETD anyone?). We wonder who will take the time to do this but, if better reporting standards are going to be put in place, you need to get moving in the next 6 to 12 months.
- A war of politics. MiFID II will be a different tale for each, depending on their current market model. For example, it was striking how much of the Continent was not mentally ready to start thinking through the pervasive impact of unbundling, while the Dutch and Brits are already on their way. We can already anticipate the screams about ESMA overstepping its mandate to the new EC/Parliament – will they stand their ground? Furthermore, the massive IT and operational burden for retail bankers – driven by reporting, record keeping and providing client information – will blow up their cost/income ratios. Look for big continental banks to place a premium on good ‘MiFID II compliant’ infrastructure in 2015 and the scramble for ‘back-office mergers to erupt. But wait … wasn’t that the objective set by MEPs in 2004?
- A war against time. As usual, we have set very aggressive timeframes and on ill-advised dates. Both the 2015 consultation and the 2017 implementation period will be over the New Year. We would hope the cooler heads that know the reality of accounting deadlines, year-end code freezes and holiday schedules will, at some point, prevail. Perhaps we could have a phased approach for both market structure and conduct rules?
August could get quite noisy with up to 1,000 missives being aimed at Paris. That said, it’s really anyone’s guess as to whether we’ll hit that kind of a number or not. The World Cup, Wimbledon, golden beaches and many other distractions might serve to cull people’s enthusiasm to get their say in to Paris.
Let us not forget too that, soon, the customer will be at the table. We note with interest that, even before the industry has had a chance to comment, ESMA has launched an EU wide communications effort .
The bottom line is that we will soon be on the brink of another massive infrastructure overhaul. All the hallmarks of recent implementation programmes (read EMIR, Dodd-Frank) are there. This could, however, make you long for the days when you ONLY had to worry about a FEW regulatory implementations to manage. Better book your tickets for Paris on 8 October for the MAD ‘hearing’.