EU's Market Rules Revamp May Be Slower Than Traders Fear

  • With Jan. 3 start date looming, industry sees more phase-ins
  • Firms may get extra time for stock, swaps and commodity rules

The “big bang” the financial industry feared when the European Union’s overhaul of financial-trading rules takes effect in January may turn out to be more of a soft launch.

The EU’s MiFID II market rules hit firms with a compliance ordeal that may ring up more than $2 billion in costs, and restrict everything from fund managers’ research budgets to high-speed trading and dealing in wheat and oil. But regulators have been quietly building in extra time to help the industry adjust to some of the law’s provisions. Norway is even considering the consequences of a broader delay.

The last-minute changes show that nearly a decade after the financial crisis, the industry and even regulators are still struggling to come to terms with the rules, which are intended to protect investors and make markets more transparent.

At an industry conference in Lisbon earlier this month, Jamie Brigstock, a director of G-10 rates trading and sales business manager at Citigroup Inc., said clients over the last year had been “quite nervous and quite scared about the cliff event, the big bang” of all the rules starting on Jan. 3. The market, he said, is beginning to understand that there will be a bit more of a transition even though the law didn’t initially envision one.

“Perhaps more by luck than anything else, it’s starting to become a little bit phased,” Brigstock said on a panel on MiFID II at the International Swaps and Derivatives Association conference.

The European Commission, the EU’s executive arm, has repeatedly said that the law will take effect in January and there are no plans to delay what is a big part of the bloc’s response to the 2008 financial crisis. The law was already postponed by a year after regulators and the industry said they couldn’t meet the original January 2017 deadline because of technology challenges.

For a QuickTake explainer on the MiFID II rules, click here.

There are signs that the industry continues to struggle to get up to speed. In a survey this year of 183 financial services executives, compliance employees and investment managers by Duff & Phelps, only 36 percent said their firm was on track to comply by January. EU member states are still in the process of converting the EU directive into national law, and only one -- Cyprus -- has confirmed to the commission that this so-called transposition process is complete.

Two of MiFID’s main changes to how stocks, bonds and derivatives are traded will probably take hold later in 2018. The European Securities and Markets Authority said firms won’t need to determine if they must register as a systematic internalizer -- a revamped type of trading platform meant to do business directly with clients -- until Sept. 1, 2018. ESMA said it would spend the first six months of 2018 collecting data to be published on Aug. 1 next year and that will be necessary for firms to decide if they must comply with the new regime.

A European Commission official said this doesn’t constitute a delay, but rather a pragmatic solution. The transition period is needed because the assessment can’t be made until six months of data are available, the official said. A spokeswoman said this week that the commission is still considering “targeted changes” to technical rules on the issue.

‘Proper Authorization’

EU Commissioner Pierre Moscovici said this week that the modification “will seek to prevent investment firms to use this framework to replicate the arrangements that MiFID II bans without proper authorization.”

ESMA is also working to complete standards that determine which contracts must occur on regulated trading platforms, a central part of the law’s goal of increasing transparency about prices for derivatives. Steven Maijoor, the regulator’s head, said on May 9 that the regulation was on track for the first quarter of 2018, rather than Jan. 3.

That has already spurred a backlash in the European Parliament, where Markus Ferber said the EU was far behind an international commitment dating to 2009.

“It should have been implemented years ago,” said Ferber, the assembly’s lead lawmaker on MiFID II. “The EU is also making a fool of itself internationally.”

Commodity Traders

In its conversion of MiFID II into national law, Germany has included extra time for firms, including commodity traders, to determine if they must be licensed in the country. Germany has proposed a transition period until July 2018.

The FIA, a lobbying association for the derivatives industry, has called on regulators across Europe to provide commodity traders more time to comply with the law. In particular, one of the requirements requires traders to determine their market share and if they’re big enough to register. The U.K. Financial Conduct Authority already has said it wants applications for approval by July so that the regulator has enough time to review them before Jan. 3.

The trouble is that a trading firm’s calculation must be based on three years of data running through Dec. 31, 2017 -- just days before MiFID takes effect. And the industry said it still doesn’t have the necessary market-wide data to even run the test. Without the appropriate authorizations, firms risk sanctions and the possibility that their transactions are unenforceable. FIA has requested help from the U.K. Treasury.

“Without reliable data available, commodity firms are hard pressed to determine whether or not they need authorization, which creates tremendous uncertainty and the potential for market disruptions,” said Christiane Leuthier, senior director of commodities at FIA, which has about 36 members it considers commodity firms.

And in Norway, which as a member of the European Economic Area must adopt EU financial-services law, officials at the Finanstilsynet regulator are already planning for the possibility of missing the January deadline. MiFID’s regulations must be incorporated into both the EEA Agreement as well as in national law, tasks that are still under way.

“Since Norway is an EEA country, there is a possibility that the implementation of the MiFID II could be somewhat delayed,” Anne Merethe Bellamy, deputy director general in the regulator’s department for capital markets supervision, said in a statement. “For the sake of good order, Finanstilsynet has asked some market participants about possible practical consequences of a possible delay.”

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