MiFID II | Are you Worried Yet?
The new MiFID
Summarising a beast of legislation like MiFID into only a few hundred digestible words is going to be a challenge, but I will do the best I can… if this gets bogged down in technical jargon and too much detail I will try to extricate you as painlessly as possible…. I hope this helps!
Background to MiFID I
As with so many things it is helpful to look back in order to understand where we are going; or at least what is informing the opening stance. The original Markets in Financial Instruments Directive (MiFID) came into law during 2004, only finally becoming applicable in November 2007. The MiFID was written to strengthen regulation of the equity market structure in Europe with the aim of lowering barriers to access for the public, fostering competition and generally opening up the markets. Then came the crash of 2007/08.
In the aftermath of the financial markets meltdown there was a regulatory need to address OTC markets, as well as to strengthen the former MiFID where gaps were appearing. The original political goals such as enhanced competition or a level playing field for all participants were not being met; in part also due to a wider trend of market fragmentation that overtook the implementation.
So what is MiFID II and when will it become real?
On 2nd July 2014 the revised version of MiFID entered into force – and is now law – however the implementation relies on a secondary process. The Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) that will define how the details of the law actually work are in preparation – more on them later.
The new revised MiFID covers equities AND fixed income, derivatives and commodities and is actually two parts of legislation; part Directive and part Regulation (MiFID/MiFIR). In brief the Directive covers areas such as scope and framework, governance, third country access and conduct of business. The Regulation addresses areas such as pre and post-trade transparency, trading venues (Regulated Markets (RM), Multilateral Trading Facilities (MTF), Organised Trading Facilities (OTF), Systematic Internalisers (SI)), and transaction/clearing elements to complement EMIR.
Waiting for Godot
Whilst waiting for the final RTS and ITS may feel more like ‘waiting for Godot’, the technical standards are on their way and in regulatory terms are being accelerated through. These standards are vital to the process of making the legislation real and cover such areas as the size of trades that will be published immediately or the precision around the definition of High Frequency Trading (HFT). They are in the process of discussion and consultation right now with the recent call for comments by ESMA to their Discussion and Consultation papers consisting of over 800 questions. They received almost 600 responses numbering thousands of response by question. Given they are due to hold public consultations on these with a final submission date of June 2015 for the RTS and December 2015 for the ITS – one can only imagine the workload and midnight oil being burnt over in Paris at ESMA’s offices. If all goes to plan the final go-live date for MiFID/MiFIR is timetabled for 3rd January 2017
What should you worry about?
All participants in the EU financial markets should be caring about MiFID and the outcomes that will have such a profound effect on how business is transacted and managed. Some of the changes appear minor at first glance, but when shown to an IT specialist bring forth sharp intakes of breath, puzzled looks and muttered expressions such as ‘non-trivial’ – which as we all know means the project will take a long time and lots of money, which by the way you probably haven’t budgeted for yet.
Those in the commodity markets will be concerned by the new position limits and reporting requirements – major changes to this asset-class.
Participants in pretty much all asset classes who transact into the market will now have to trade through one of the regulated venues, whether an exchange-based RM (think LSE or Eurex) or a regulated OTC model such as MTF or OTF. (MTF – think non-discretionary trading in TradeWeb or MarketAxess, OTF – think discretionary trading in Tullets or ICAP) Those who wish to and who are able to trade bilaterally with their bank, will find that anything vaguely liquid will be required to trade through the bank’s SI.
What does all that mean? All venues have an obligation to publish, to the public, a range of pre and post trade pricing. This increased transparency, which sounds positive, will be driven by the calibration of thresholds that define how and which transactions are caught up in the transparency regime – which will affect available liquidity one way or another.
The duty of care that a client will be due ratchets up significantly with a range of impacts. For instance, if there is the need to examine a client trade, the bank will be required to recreate a connected stream of contacts with the client from initial marketing, through the trade cycle, to settlement.
Summary – and why you should worry now.
MiFID will be transforming the way many of us trade and interact within the financial markets, across most asset classes. Many of these markets have until now enjoyed a far lighter touch than the new MiFID regime will deliver. Managing the calibrations that make sense of any politically driven legislation can be challenging, however with the best preparation and intentions in the world, the MiFID is demanding a colossal workload. The effects on the markets will be profound, some already being thought about and prepared for, whilst others are not yet imagined. Many of the technical solutions will take many months, if not years, to design and build. As the leaves start to turn and we approach the autumn, the time for three-year forecasts is approaching. Consider any assumptions about the market that are baked into your regular planning. Do you assume that the principal-based market structure is maintained or are you factoring in a move to quasi-agency model? Are you allowing for a potential increased cost of transactions through wider spreads or explicit commission? What about collateralisation of non-cleared trades? Have you planned for the new sales process that might entail a relational database with multiple tags for each element, linking the various pre-sales chat(s) to the final trade(s) that may or may not result? Are you worried yet?