EC delays Mifid II implementation to January 2018

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Jonathan Hill, European Commissioner for Financial Services, Financial Stability and Capital Markets Union has announced a delay of one year to the implementation of Mifid II, in response to concerns expressed by the European Securities and Markets Authority in regards to technical and technology requirements being placed on the industry.

In a statement, the EC said the new deadline would be 3 January, 2018, by which time it is expected Esma will have completed its data collection; data is required on some 15 million financial instruments available through 300 trading venues for Mifid II to work, according to Esma.

“To achieve this result, Esma must work closely with national competent authorities and the trading venues themselves,” the EC’s statement noted.

“However, the European Commission was informed by Esma that neither competent authorities, nor market participants, would have the necessary systems ready by 3 January 2017, the date by which the Mifid II package was initially scheduled to become operational. In light of these exceptional circumstances and in order to avoid legal uncertainty and potential market disruption, an extension was deemed necessary.”

Hill (pictured) added: “Given the complexity of the technical challenges highlighted by Esma, it makes sense to extend the deadline for Mifid II. We will therefore give people another year to prepare properly and make the necessary changes to their systems. Meanwhile, we are pressing ahead with the level II legislation to implement Mifid II and expect to announce those measures shortly.”

Mifid II regulations came about because of concerns that initial responses to the global financial crisis had left loopholes that could create future systemic threats to Europe’s financial system.

Provisions of the second version of the Directive include:

  • Ensuring that trading takes place on regulated platforms
  • Rules on high frequency trading
  • Improving transparency and oversight of financial markets – including derivatives markets – and addressing price volatility in commodity derivatives markets
  • Improving conditions for competition in the trading and clearing of financial instruments
  • Introducing organisational and conduct requirements

Under the drive to introduce more transparency to markets, Esma issued a statement in September 2015, which outlined the following points under the banner of “Fairer, saver and more efficient markets”:

    • Tests to determine whether a non-financial firm’s speculative investment activities are  so great that it should be subject to Mifid II
    • Ranges for the new EU-wide commodity derivatives position limits regime
    • Rules governing high-frequency-trading, imposing a strict set of organisational requirements on investment firms and trading venues
    • Provisions regulating the non-discriminatory access to central counterparties (CCPs), trading venues and benchmarks, designed to increase competition
    • Provisions requiring trading venues to offer disaggregated data on a reasonable commercial basis

One key question not addressed by the EC in regards to the new deadline is how this would affect UK product and services providers should the pending referendum on continued EU membership result in a vote to leave the EU.

Responding to today’s news, Jay Iyer, director in the Risk and Regulation practice of global advisory firm Protiviti (technology specialists), said: “Following the announcement this morning, the central message coming from our clients is that much of what comprises Mifid II is already well known and it is time for firms to press ahead with their implementation projects, regardless of the delay. Notably the bigger implementation efforts such as reporting require prioritisation, not only from an internal perspective but also where there is a reliance on external vendors to support the reporting mechanism.”

“The delay may provide an opportunity for firms to be more efficient in their planning, and coordination of their change initiatives in a more effective manner to avoid duplication of effort where there may be overlaps. We expect there will be less regulatory forbearance on areas like data quality and the readiness of systems now the timetable is longer to implement the significant changes required.”

Bobby Johal, managing consultant at Cordium, provider of regulatory compliance consulting services, accounting, tax and software to the asset management and securities industry, said: “This announcement is the clarity that the industry has been waiting for. It’s important that firms take advantage of this extra time to get the necessary systems and processes in place, rather than delay their response.”

“In a poll of asset manager compliance officers conducted at our annual conference last week, 75% of delegates said their Mifid II plans were on hold, pending this clarity. At the same event, a number of issues were highlighted as being of specific concern – including those which require both process and IT infrastructure changes. Transaction reporting was one such example, with more than 80% of respondents relying upon counterparties for some or all of their reporting.”

JP Urrutia, general counsel, EMEA for broker ITG, said: “We’ve heard that the Commission has started the formal process for delaying Mifid II implementation, but it’s not done and dusted: the European Council and Parliament still need to agree.”

“General belief in Brussels is that the delay will be agreed, but there’s always a chance that politicians could try for a second bite at the cherry and look to negotiate additional changes. If someone does successfully re-open other aspects of the level 1 legislative Mifid II text though, expect some turbulence along the way that could even derail this carefully crafted Commission plan. As attributed to [former UK prime minister] Harold Wilson, ‘a week is a long time in politics’. Other discussions suggest that some are pushing for a staged approach to implementation, which could push some aspects even beyond the new deadline – but that’s highly speculative.”

Ian Salmon, market consultant – Finance, Accedian Networks, said: “Requirements such as the introduction of universal timestamping are a big step change for the industry – and it’s clear this delay is to allow for the crucial technical work to be completed. However, it’s important we don’t get complacent about timings as this is about more than just compliance. Timestamping, for example, has the potential to deliver major cost benefits across the sector – so it’s vital we get this right.”

“Disparate trading platforms typically lack a common time reference, making it nearly impossible for firms to get a complete view across their multiple systems. Timestamping is a crucial turning point because it creates a common language that allows firms to link these disparate worlds and gain far more granular insight.”

“Aside from regulatory compliance, one major benefit will be the ability to view analytics in a whole new way and with far greater control. For the first time, firms will be able to analyse variables such as liquidity and cost of execution across platforms to truly understand trading performance, trade by trade, client by client.”

Giles Kenwright, head of the investment banking regulatory practice at financial markets consultancy Delta Capita, said: “It is fair to say that the industry has been in limbo since Esma chairman Steven Maijoor first questioned the feasibility of the January 2017 deadline, back in November last year. We have seen a number of market participants, already burdened with regulatory fatigue and challenging market conditions, use this as an excuse to take the foot off the gas of their Mifid II programmes.”

“Today’s announcement will certainly help to re-focus the industry again, removing recent ambiguity. However, a number of participants will find that an extra year is simply not enough to cope with the scale of the change required. Even Maijoor recently warned that an additional year may not be sufficient for asset managers to react, which may indicate that Esma and the European Commission are not in complete agreement about the revised date.”