Mifid, VM mismatch and Japanese CVA

The week in Risk.net, March 24–30 2017

VM SETTLEMENT MISMATCH means a problem for the buy side

MIFID designations still unclear for venues

CVA shift could open Japan for swap business


COMMENTARY: The perils of a hands-off Mifid approach

The second European Markets in Financial Instruments Directive, Mifid II, comes into effect in January next year, and despite the fact its reach will extend far beyond Europe’s borders, its architects seem to be taking a remarkably laid-back approach to its implementation. In particular, financial institutions are growing increasingly alarmed about the lack of clarity around several key definitions in the directive. One example is that while it lays down clear limits on what bilateral and multilateral traders of various kinds can do, it leaves the definitions of each type of trader worryingly vague. 

There’s vagueness, too, around Mifid’s rules on post-trade reporting, with national regulators expected to offer very different grace periods before trades are reported – from two days to four weeks, opening the gates for significant regulatory arbitrage.

It seems the Brexit process – which formally got under way this week, with preliminary negotiations due to start in late April – has not helped; earlier this month, Risk.net learned that third-country guidance had been delayed, perhaps for months, by the EU’s desire to keep a strong negotiating position over the post-Brexit future of the UK financial industry.

So is this a sign of a new trend – faith-based financial regulation? At present it seems to be – nervous banks and traders are simply being told to follow the spirit of the regulation and trust that everything will turn out all right, rather than awaiting strict scriptural guidance. But it’s worth remembering a couple of other points as well. First, the risk of regulatory arbitrage is real – but both the industry and its national regulators will also have strong incentives to harmonise regulations such as reporting delays, in order to minimise the operational cost and risk of operating under many different standards in different EU jurisdictions. Second, as recent years have shown, regulatory reform operates on a last-minute basis – major reforms, such as the introduction of variation margin requirements earlier this year, are uncertain right up to the deadline and beyond. If the details of Mifid follow the same pattern, it will not be a smooth process – but it will be nothing unfamiliar for the industry.



Under the EU’s forthcoming General Data Protection Regulation (GDPR), due to take effect in May 2018, banks can face fines of up to 4% of their global turnover if they suffer a serious data breach. Had the GDPR been in place at the time of the cyber attack that hit Tesco Bank in early November 2016, which resulted in the theft of some £2.5 million ($3.1 million) from customers’ accounts, the bank could have been faced with a £1.9 billion fine



To make it clear, the entity approach [to determining systemically important insurers] is relevant because failure is very much entity-based. The company fails and that has a huge systemic impact, as we have seen in the financial crisis. So we are keeping our entity-based approach, but it will be complemented by an activity-based approach” – Yoshihiro Kawai, IAIS



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