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Banks' Wait for Clarity on EU Market Overhaul Will Soon Be Over

  • Industry asked for more time to build data reporting systems
  • Contentious issues remain, like investment research payments

Financial firms will learn this month when they’ll have to start complying with the provisions of MiFID II, the overhaul of market rules at the heart of the European Union’s response to the financial crisis, covering everything from derivatives trading to bond-pricing.

The European Commission, the EU’s executive arm, will release details by the end of January on how long it will delay implementation, according to two people with knowledge of the matter. That issue is still being debated, and may range from 12 to 15 months after the original January 2017 deadline.

The European Commission reassessed the implementation date after the European Securities and Markets Authority, the EU markets regulator, said there wasn’t sufficient time for banks and other financial institutions to build necessary data-reporting systems before the original 2017 deadline. Now policy makers are is racing against the clock as they sort out the delay and complete the raft of technical standards needed to make the law work.

“I am very disappointed that the whole process is taking so long,” said Markus Ferber, vice-chairman of the Economic and Monetary Affairs Committee in the European Parliament and the assembly’s lead lawmaker on MiFID II. “The Commission announced their initial concerns with regards to a delay three months ago and still has not managed to provide us with an official proposal yet. The same is true for the implementing legislation for which we still have not seen any final proposal.”

Delegated Acts

One set of rules, known in Brussels as delegated acts, is nearly done. They cover contentious issues such as new rules on payment for investment research. Draft rules seen by Bloomberg News in December suggest that banks and investment managers are set to win concessions as regulators seek to break apart the existing model of paying indirectly for research. The EU’s executive arm has decided to distinguish between “non-substantive material or services,” which an investment manager can accept as a “minor non-monetary benefit,” from research containing “analysis and original insights” for which the firm must pay.

The delegated acts will likely come at the same time as the Commission’s announcement on the delay, or shortly afterwards, said one of the people. The member states of the European Union and the European Parliament can subsequently object, prolonging the process by up to six more months.

Technical Rules

Regulatory technical standards, which cover issues such as position limits, also must be completed. The Commission probably won’t be prepared to release its verdict on the rules until March, even though ESMA handed over its proposed technical rules to the Commission in September. The rules are separated into 28 sections. The Commission is still deciding its course of action.

“I am sure we will be able to find a sensible thing working with ESMA, taking their view as to how long they need,” said Jonathan Hill, the EU’s financial services chief. “We’ll be coming back not before too long with where we’re going to end up with some of these important issues, and then I think the industry will have more certainty and clarity. We’ll be able to set out the timetable, and then people will be able to plan.”

If the Commission finds a problem with the technical standards the process could drag, since it must notify ESMA and wait for a response.

‘Infrastructure Complexity’

Hill said the delay is necessary because of the information technology challenges faced by the industry, and won’t be used to alter the legislation, or cater to lobbyists.

“This is a technical, IT infrastructure complexity issue,” Hill said. “The volume, the size -- no one’s tried to do this before. The amount of time that was allowed for in terms of handling the preparatory IT elements wasn’t enough because the dossier is so big and complicated.”

MiFID II is unprecedented in terms of its scope. While other pieces of financial regulation such as the European Market Infrastructure Regulation, were proposed in multiple packages and phased in over the years, MiFID II has been presented in one piece because so many provisions within the regulation are closely linked with one another, said the European Parliament’s Ferber.

“As the whole package is so complex, it is even more important to get everything right in the first place,” Ferber said. “This is also a reason why I am so disappointed by the secretive approach ESMA and the commission have been taking in the process -- it makes proper public scrutiny much harder.”

“MiFID is a huge task,” said Hill. “One has to be realistic about it. I don’t want to delay it longer than I need to delay it. By the same token, I don’t want to set a deadline that then ESMA can’t meet, leading to the the same problem all over again.”

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