MiFID II launch hit by futures fears over Brexit

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The much-heralded launch of the revamped Markets in Financial Instruments Directive (MiFID II), billed as the greatest regulatory shake-up of the City since Margaret Thatcher’s ‘Big Bang’ deregulation in 1986, that comes into effect today has been hit by missed deadlines and extensions in futures markets.

UK regulator the Financial Conduct Authority (FCA)  and its German counterpart the Federal Financial Supervisory Authority BAFIN have awarded their futures exchanges a last-minute reprieve that gives them 30 months to comply.

The FCA made the announcement this morning, while the German regulator’s decision was announced late last night.

It seems that the impetus for the move came at the behest of the futures exchanges who said that they needed more time to adapt in the light of Brexit.

Last-minute reprieve

In a statement published at 7am on its website, the FCA said that it had received applications from the trading venues ICE Futures Europe and the London Metal Exchange (“LME”), while BAFIN said that it was responding to an application from the Deutsche Börse-owned Frankfurt-based futures exchange Eurex.

“Having taken into account the risks resulting from the application of the access rights under Article 36 as regards exchange-traded derivatives to the orderly functioning of the trading venues referred to above,” the statement continued, “as required by MiFIR, the FCA has decided to agree a transitional arrangement for those entities.

“Accordingly, with effect from 3 January 2018, ICE Futures Europe and LME will not be required to consider open access requests made under Article 36 insofar as they relate to exchange-traded derivatives, until the expiry of the transitional period on 3 July 2020.”

Brexit a ‘game-changer’

The last-minute nature of these reprieves will surprise some commentators since the proposed changes have been the best part of a decade in the planning, and seem to have come at Eurex’s insistence that uncertainty over Brexit means the rules of engagement are changing.

That is to say that, since MiFID II is intended to create greater open access to markets with both increased competition and greater protection for investors, it is not clear to what extent that the UK will be bound by the new rules after it exits the UK.

As Europe’s largest derivatives-trading market, the UK could theoretically gain a competitive advantage were it not subject to Europe-wide “level playing field” rules.

“Brexit is a game changer,” Eurex said following BAFIN’s decision. “We share industry concerns around financial stability regarding the open access provisions of MiFID II.”

One of the key changes under MiFID II is what is called “best execution”, a requirement that advisers will need to have records showing that they made every attempt to secure the best price for a client.

MiFID II is expected to cost the industry some £2.2bn (US$3bn, €2.5bn) to implement, with the biggest banks predicted by research consultancy Opimas to spend £35bn (US$48bn, €40bn) on ensuring that they will be compliant.