Eugene Grygo, Chief Content Editor, FTF News
While U.S. and European authorities are finally making progress in harmonizing key rules and regulations, it’s becoming painfully clear that the lack of an initial, collaborative response among regulators to the global recession is hitting home for all securities firms.
A case in point is the recently announced (and expected) new deadline for the Markets in Financial Instruments Directive/Regulation (MiFID and MiFIR), which together constitute MiFID II.
If you read between the lines of the European Commission’s memorandum on the matter, it’s possible to imagine European and actually all securities firms buckling under the burdens of two major phases of regulatory reforms — first the U.S. and then the European Union. (For the moment, it looks as if the major Asian trading centers will take a wait and see approach and are likely to implement the reforms of the Americans and Europeans.)
Unlike American regulators and authorities, the EC engages in fairly clear and straightforward language and its recent memo frankly points out the rather difficult data-gathering problem at the heart of the MiFID II delay as discovered by the EC’s European Securities and Markets Authority (ESMA).
The new regulatory framework to come after MiFID II “requires trading venues and systematic internalizers to provide competent authorities with financial instrument reference data that describes in a uniform manner the characteristics of every financial instrument subject to the scope of MiFID II,” according to the memo.
“Additional data are also used for other purposes, in particular for the calculation of various liquidity and transparency thresholds used for on-venue trading of all financial instruments covered by MiFID as well as for positions reporting of commodity derivatives,” say EC officials.
But to get the data essential for the MiFID II reforms requires “a new data collection infrastructure” and many more steps by ESMA and “competent national authorities” to create the Financial Instruments Reference Data System, which has the unfortunate acronym of FIRDS.
EC officials say correct reference data is needed mainly for
- Transaction reporting: “Without reference data, there will be challenges to determine what instruments are within the scope. In addition, the necessary infrastructure for market participants to report to their competent authorities will not be available;”
- A transparency framework: “The trade transparency rules for all financial instruments (equity as well as non-equity) cannot be established and applied. In addition, the calculations and thresholds for the liquidity assessment, waivers, deferred publication and, in the equity area, the double volume cap (which limits dark trading) cannot be established;”
- Commodity derivatives: “In the absence of position reporting for commodity derivatives it will be very difficult to enforce position limits on such commodity derivative contracts. With no position reporting, there is a limited ability to effectively detect breaches of positon limits.”
- Microstructural regulation: “Many of the requirements in relation to algorithmic trading/high frequency trading are by their nature dependent on data. In particular, the key provisions on tick-size regime and the obligations in relation to market making obligations and schemes are also tailored on there being a liquid market as determined under the transparency framework.”
Apparently, ESMA and EC officials gave the situation some careful thought and decided to extend the deadline “for the whole package, including investor protection rules, as opposed to a staggered approach,” which is intended to give firms:
- A chance to avoid the “risk of causing confusion and unnecessary costs that stakeholders would incur through a staggered implementation. Building various infrastructures simultaneously — as opposed to doing so in stages —would make the process more cost effective. For example, it avoids situations, where investment firms, involved in execution of orders, would have to set up organizational requirements/conduct rules in stages, which would be complicated, expensive and costly;”
- A way to sidestep “having to delineate between the areas that can be immediately implemented and those that cannot be, and, therefore, avoids the risk of causing unintended consequences which may not have been foreseen or sufficiently considered;”
- And to no longer worry about “transitional rules, which by themselves would create new issues and divert resources of ESMA, NCAs and stakeholders from building the permanent framework.”
Firms do have to some MiFID II worries ahead of them. EC officials are granting a deadline extension but they want a few things in return:
- ESMA, national competent authorities (NCAs) and operators will need to “put in place the infrastructure for data collection, reporting and the transparency threshold calculations;”
- And the EC is specifying five steps for that implementation process: “(1) business requirements (which in this case are the necessary regulatory technical standards/implementing technical standards), (2) specifications, (3) development (4) testing and (5) deployment.”
It’s really anyone’s guess as to whether the new January 3, 2018 deadline will be enough given the scope of what has to happen across a continent. But the deadline extension does address the burdens that firms are facing in the run-up to the deadline. It also shows more care and concern about IT and operational implementation than the U.S. regulators have ever demonstrated.
The deadline extension, however, is causing some Americans to privately wish that Europe would have acted much sooner and in lock step with the U.S. regulators.
While the concerns over the pace of the European regulators are legitimate, U.S. regulators have a lot to answer for.
Why did the U.S. regulators just bulldoze ahead with little regard for their Asian and European counterparts? Why wasn’t the top priority of the U.S. regulators global coordination in order to save all securities firms from having to double or triple their efforts in meeting two or more regulatory regimes?
Part of the answer is political.
The Democrats at the federal level wanted to ram through as many reforms as possible before the Republicans could grab power and stop Dodd-Frank and all other regulatory changes for the financial services industry. There was not and never will be any political harmony on that front in the U.S. Wall Street has become another heated battlefront in the blood sport that has replaced compromise in our federal government.
The other part of the problem is the complete lack of vision and courage among U.S. and European politicians and regulators — a global recession might have needed a global, coordinated response.
But this is not what the industry got and, as we know, sanity rarely prevails today.
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