This month, ESMA hosted a broad cross-section of market participants for a final ‘hearing’ on the MIFID II technical standards they will send to Brussels for approval this summer. Of course, many attendees were surprised to find that, while they were en route to Paris to sit for 10 hours with 350 of their closest friends, another 355 pages of MiFID II technical standards consultation were issued for comment by 20 March. Less surprising, perhaps, was the open talk of a detailed cost/benefit questionnaire that is on its way this month.
As we have known for a while, if all goes according to plan, the 2500+ pages of consultation and CBA will redefine the trading landscape in the European Union in 2017. What was apparent from this hearing is that, despite the last minute rush to Paris with suitcases of industry data, we are nearing the end of the initial discussion phase and the implementation phase is nearly ready to launch.
Up until now, the whole industry – regulators included – has been trying desperately to interpret what the politicians meant in the level one text and subsequently reclarifying the precise rules that will come into force on 3 January 2017.
The message from ESMA in Paris this month was one of proactive listening – looking for ‘known unknowns’ that have not yet been addressed. There were a few nuggets uncovered through the long and intense day, like treatment of packaged products, but most of the detailed issues that were raised were simply noted for further consideration. No doubt scores of special interest groups will remain busy behind the scenes seeking to influence the final texts.
For all of ESMA’s rhetoric about openness, the fact is that there was a large number of suggestions which were either dismissed out of hand or ignored. In fairness to a panel that often spoke with admirable clarity, there may have been little more that they could do in front of such a disparate array of people with different business interests, all desperately trying to protect their own profit margins.
We’ve had a look at our 40 pages of notes and distilled the key issues that were up for discussion last week. We concluded that those of most importance to the sell-side are largely ready to go ‘as-is’ and will not be subject to a significant level of further change. What is needed now is the will to create implementation standards.
Table 1: Nine hours of Paris MiFID II hearings on one page
|MiFID II implementation stream||Standards effort||02/15 hearing issues raised||Likelihood of significant requirement change|
|Trading obligations and venues||High||ETFs, corporate bonds, asset class switching, product packaging, SSTI, RFQs, position limits, unbundling, price discovery, venue monitoring, mandatory on-exchange trading, tick sizes, pre-trade, HFT, SI obligations, CTPs, commodities||Medium|
|Reporting and data management||High||Data publication, reference data, organisational requirements, waivers, identifiers, deferrals, publication, monitoring, position limits, reporting protocols, dual reporting, market data, large in scale, COFIA, intragroup transactions, liquidity, clock synchronisation||Low|
|Investor protection||High||Best execution, data tsunamis, counterparty classification, report timing, trading venue versus execution venue obligations, 3rd country investors||Low|
|SYSC||Medium||Algo controls/testing, proportionality, non-live testing, algo execution definition, real time algo controls, market making requirements, notifications, order to trade ratios, tick sizes, authorisation||Low|
Perhaps the most repeated line heard from the stage was some variation of “we don’t disagree, but …”. Whether ESMA’s inability to act is due to the implied lack of time and resource, as in responding to the criticism of the COFIA approach to defining liquidity, or the limitations of the mandate handed to them by the politicians, as in only being able to define the format of position reports and nothing more, we still don’t know the answers. It is worthy of note, however, that some topics which are known to be generating a lot of heat (e.g., transaction reporting), were not brought to the floor by the trade associations.
A real indication of how hamstrung ESMA feel by the level one text of MiFID II was a stark admission that, rather than their liquidity standards being about actually defining liquidity, it was more about writing them in such a way that will allow the transparency rules under MiFID II to be workable. One message that certainly came out of the hearing is that the data tsunami that MiFID II will catalyse is going to force firms to revisit their infrastructures and work with their supply chain to find more efficient and cost effective ways of meeting the ever expanding requests.
The sense that we took away was that the final rules are imminent and only in a handful of areas will fine tuning occur. Of course, this does not mean that all the rules will be written in a way that makes them clear and that offers a glimpse of the of implementers’ future reality.
From July, the only mechanism that the regulator will have to help guide the industry will be the dreaded Q&A documents. For those of you lucky to have experience of EMIR implementation, you will remember the important issues of scope and detail were not always as fixed as we had presumed. At the 11th, 12th or even 13th hour, important requirements were clarified in detailed, but at times vague, new standards which were to be immediately applied.
The concern for MiFID II implementation teams is that we are likely to see Q&As published at a rate that will make even EMIR pale by comparison. At one point this was quite openly acknowledged by the regulators. Better have your change programmes ready to fire-up, hover and then take off quickly …
Overall, we were heartened by this progression. The time for speculation is running out and the real implementation work will be upon us in only 467 days. In light of all of this, we are pleased to be able to say that our MiFID Implementation Group is now getting out of the blocks to help tackle the challenges head on. Let us know if you are interested in getting involved. Also, watch for details of our RegIT MiFID II course shortly.
For further MiFID II debate and discussion join MiFID II: The working group from JWG on LinkedIn