MiFID II and its regulatory cousin, MiFIR, have some lofty ambitions for European securities and derivatives markets. And one of their most clearly stated goals is to enhance market transparency by bringing about changes to market practices, and potentially even market structures.
The problem is that, while transparency may be seen as a new wonder drug that will cure all the industry’s ills, it does not come without side effects. It was therefore refreshing to see the European Securities and Markets Authority (ESMA) promoting a collaborative approach with the industry in defining the details of how MiFID II and MiFIR are implemented.
ESMA is charged with developing approximately 100 technical standards, or advice, relating to MiFID II and MiFIR. In doing so, it intends to go through a consultation process with the market and hold public hearings to solicit feedback on its proposals for each of those standards. As part of that process, regulators have demonstrated they are conscious of the market perception that mandating increased transparency could potentially hamper liquidity – which will come as a welcome relief at this stage in the process.
Alluding to its cooperative approach, in a speech at AFME’s European Market Liquidity Conference earlier this week, ESMA executive director, Verena Ross, noted that “the correct calibration of liquidity thresholds will be critical in order to provide investors with the right balance between transparency and protection.”
Those liquidity thresholds will be important for determining both pre- and post-trade transparency waivers. Investors seeking to limit market impact will therefore be granted certain exemptions from pre-trade transparency (to avoid signalling their intentions to the broader market), while liquidity providers will be granted post-trade deferrals to ensure they have enough time to get off-risk before publishing a trade to the market.
In addition to transparency waivers, ESMA is also charged with working on various other regulatory details, including (but certainly not limited to) determining which instruments are required to trade on a MiFID venue (echoing the Made Available to Trade determinations set out via Dodd-Frank) and setting waivers for non-discriminatory access to trade feeds, clearing infrastructures and benchmarks (determining exactly how and when certain siloed infrastructures will be opened up to competitive forces).
In aggregate, these technical standards have the potential to bring about broad changes to market practices and the way securities and derivatives firms do business in Europe. That’s why ESMA’s deliberations will be so important. And it’s also why the market needs to be prepared to engage at the earliest possible opportunity when consultation papers are published, which we expect to happen in June. With the typical consultation period lasting only 90 days, many of us may have to put summer holidays on hold to face the scope and scale of the challenges ahead.
And while the promise of a consultation paper and public hearing sounds encouraging, there is still a widely held suspicion in the market that regulators will not be as open to industry feedback as hoped.
On the issue of transparency, Ross may have recognised the need for properly calibrated waivers for its rules, but still underscored ESMA’s broad stance on transparency: “Even if the concept of liquidity in the equity market cannot be mechanistically extended to the bond market, this does not necessarily imply that transparency rules should be more lenient for bonds or derivatives with respect to equities in all cases.”
As the technical consultation process for MiFID II/MiFIR draws closer, the market will therefore be hoping that lessons are learned from previous implementations. For example, ESMA did not necessarily endear itself to the industry when issuing last minute guidance via a Q&A on the eve before EMIR’s trade reporting requirements launched earlier this month.
Ross recognised some of those difficulties, particularly the compressed implementation deadlines – “months, rather than years” – and also noted that the Q&As were not binding, unlike its technical standards, which will be.
The hope is that ESMA will not only go through the due legal process of consultation in defining its technical standards for MiFID II/MiFIR, as required, but also that it will be receptive to the industry’s recommendations and concerns.
After all, problems with EMIR trade reporting do not directly hurt firms’ bottom line. But decisions around trading obligations, transparency waivers and non-discriminatory access provisions do threaten to have a direct monetary impact on businesses across Europe.
The stakes have been raised, so it is encouraging to hear regulators making the right noises in being receptive to feedback. Let’s hope that translates into a truly cooperative approach.