The European Commission has postponed the start-date for the key financial markets directive to January 2018, but participants are still waiting for the final rules. 

What's happening?

In February 2016, the European Commission ended weeks of speculation when it officially announced a one-year postponement of the start-date for the vast Markets in Financial Instruments Directive (MiFID II), to January 2018. The European Securities and Markets Authority (ESMA) had formally requested a delay in October 2015. “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,” said Jonathan Hill, European Commissioner for financial services, announcing the delay.

What’s the hold up?

The major stumbling blocks revolve around the financial instruments reference data, or Firds, project required to calculate many of the key ratios that will determine thresholds for specific regulations governing pre- and post-trade transparency for financial instruments. Whereas MiFID I applied only to equities, MiFID II will take in every traded asset class, bringing a wide range of new products into its regulatory ambit for the first time. The European Commission said that ESMA has to collect data from about 300 trading venues on approximately 15 million financial instruments.

“Everything comes back to the reference data – dark pool caps for equities, pre- and post-trade rules for non-equities, and position limits for commodities. Where there are legal consequences, for example to breaching position limits, you have to make sure that this data is accurate and reliable. Newly regulated entities such as commodity firms will not have systems that are fit for purpose yet,” says John Ahern, leader of the financial services regulation team at law firm Jones Day and a former in-house counsel at Merrill Lynch.

Problem solved?

Not yet. The European Parliament had signalled reluctant approval of ESMA’s request in November last year. However, that support was conditional on a “clear roadmap on the implementation work”. The industry is now echoing parliamentarians’ concerns about improving the organisation of MiFID preparations, rather than just extending the deadline.

“In the middle of last year, we were 18 months from implementation and still waiting for the final rules. At the moment, we are not much better off, because we are still waiting for the final rules,” says Mark Croxon, head of regulatory and market structure strategy at the Bloomberg trading platforms.

In particular, many of the technological steps that market participants need to take can only begin once ESMA and the European Commission have finalised technical standards. In its press release announcing the postponement, the commission said the timeline for adopting the level-two technical standards had not changed, and it expected to announce these measures shortly. Simon Maisey, a managing director at derivatives and fixed-income trading platform Tradeweb, says there are great limits on what can be done until final rules are in place, and it is difficult to sequence the work in separate stages as the rules are very interdependent.

“It would be good from a process viewpoint to phase in each step, such as defining the reference data, then using that definition to gather the individual trade level data, and then use that to carry out the necessary liquidity calibration and set the thresholds. But in practice, the framework of rules requires that everything is done in one go. For post-trade reporting to work, you need to know who has to report each trade,” says Mr Maisey.

While you wait?

Mr Ahern points out that a postponement of the MiFID start date could also create fresh difficulties that ESMA and the European Commission will need to address. Foremost among these is that the MiFID II legislation already on the EU official journal repeals MiFID I at the start of 2017, which could result in a legal vacuum now that MiFID II is only ready to roll out in 2018.

“One possibility would be to revisit MiFID II to change the implementation date and allow MiFID I to continue until then, but that would be politically charged because it means going through the whole legislative process again – which could take more time than the delay itself. There could be some compromise arrangement whereby if firms continue to comply with MiFID I they will be deemed to have complied with MiFID II until it is ready to enter force,” says Mr Ahern. 


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