Industry associations are calling for a staggered implementation to Europe's second Markets in Financial Instruments Directive (Mifid II), despite opposition from some national authorities. Under one of the proposed approaches, key elements of the rules would not take effect until December 2018 – two years after the originally planned start date.
On February 10, European authorities officially proposed a one-year delay to the January 2017 application date, but the associations argue this will not solve a sequencing problem that is baked into the framework. Some of its key transparency requirements depend on whether a given instrument is liquid or not, but this designation can only be applied after the rules come into force, they say. This is because it is unclear what is ‘traded on a trading venue' – and only products receiving this tag will be subject to Mifid II's pre- and post-trade transparency regime.
Banks with a significant market share in any given instrument will also be subject to new transparency requirements, but will be unable to determine whether they reach that volume threshold until EU-wide trading data becomes available.
The postponement does not guarantee an orderly transition. Many of the trade transparency-related requirements taking effect in January 2018 depend on data that, as things stand, would only begin to be collected from the market in January 2018
Roger Cogan, Isda
"The postponement [of the Mifid II start date] does not guarantee an orderly transition. Many of the trade transparency-related requirements taking effect in January 2018 depend on data that, as things stand, would only begin to be collected from the market in January 2018," says Roger Cogan, head of European public policy at the International Swaps and Derivatives Association (Isda).
In a document sent to EU regulators on January 29, Isda and the FIA – both of which represent banks alongside other firms – set out two ways of staggering the start of Mifid II. Failing to do so runs the risk of a "long-lasting negative effect on the efficiency and liquidity of the European derivatives business", they warn. Risk.net reported on January 28 that banks are considering asking regulators for phased implementation of the new regime, on top of the one-year delay.
The European Securities and Markets Authority (Esma) has confirmed it has received the associations' document, but declined to comment on the idea of staggered implementation. "Esma has no competency in this area. The European Commission is the EU's executive power who took its decision [on the delay]," a spokesperson says, although Esma wrote to the commission in October to request a delay to the January 2017 start date.
The European Commission has declined to comment.
The two options put forward by Isda and the FIA in the 18-page document mean data would be collected before the full pre- and post-trade transparency rules take effect. The first scenario would maintain the one-year delay, resulting in a January 3, 2018 start date for all elements of the rules. Under the second option, the full regime would not take effect until December 2018.
Option A would involve collecting data under the terms of the existing Mifid regime from entities classified as regulated markets (RMs) and multilateral trading facilities (MTFs). The former would include firms such as Bats Europe, while the MTF regime currently includes MarketAxess and Tradeweb. Existing RMs and MTFs would be obliged to collect data during the first half of 2017, covering trading activity in the previous six months, and submit it to Esma. Then, Esma would publish a list of instruments deemed liquid, as well as the size thresholds at which pre- and post-trade reporting requirements apply to each trade. The second half of 2017 should be used by the industry to assess the business impact of these rules and make any necessary adjustments, suggest the industry associations.
Option B operates under a similar theory, but at a later date. Isda and the FIA suggest data should be collected from trading venues and investment firms from the start date of January 2018 – assuming a one-year delay is granted – and be followed by an 11-month transition period. All financial instruments would be deemed illiquid until the end of this period, while Esma and local regulators collect data to determine the appropriate designations for products.
Under this scenario, Esma and local regulators would collect post-trade data from venues in the first half of 2018, and this would be published by Esma between the third quarter and the end of October 2018. That would make clear what is traded on a trading venue, addressing a key complaint raised by the industry associations about the scope of the transparency rules. For example, they argue it is unclear whether an instrument merely needs to be listed as capable of being traded on a venue, or whether actual trading needs to take place and, if so, how much.
The data sequencing would also enable firms to determine whether they have enough market share in a given product to be classed as so-called systematic internalisers under the rules. Systematic internalisers, along with regulated venues, will have to publish bids and offers before a trade is executed, and price and size afterwards.
Banks have been warning for months they will not be able to work out whether they are systematic internalisers while there is no comprehensive data on the size of the European market in specific instruments.
It is uncertain whether regulators will consider the associations' request, as some European supervisors have already made clear their lack of enthusiasm for staggered implementation. Officials from the UK and Germany's finance ministries dismissed the idea that parts of Mifid II could be postponed in a December letter to the European Commission, stating they supported a one-year delay but did not consider phased implementation a "viable option".
Additional reporting by Fiona Maxwell