By Shira Rottner, Business Development Manager at Shield (www.shieldfc.com)
As MiFID II continues through its second year, some policy experts are already questioning whether it really has provided the post-2008 financial reforms that the EU desperately needed, or whether it has become simply another set of empty standards which have failed to live up to their promise.
The European Union’s ‘Markets in Financial Instruments Directive II’ (more commonly known as MiFID II) was designed as a major improvement to the integrity of financial markets within Europe. The rules demand greater scrutiny of potential conflicts of interest and require extensive reporting of transaction-related data, which has ensured many financial institutions have frantically had to adapt to be fully compliant.
Lack of enforcement
The directive was passed by European financial regulators chiefly to protect consumers. The policymakers were concerned that highly sophisticated financial firms could exploit consumers through their lack of knowledge/education on certain financial transactions and instruments.
The 2008 financial crisis highlighted these potential issues and the regulatory agencies acted quickly to tackle and mitigate any market manipulation, fraud and any other inappropriate or dishonest activities that consumer ignorance of the financial services market could enable.
The drafting of MiFID II was a key part of this response, however the lack of enforcement action since the legislation went live raises serious questions as to whether the regulations protect consumers in the ways that were envisaged.
Since MiFID II’s launch on 3rd January 2018, there have been noticeably few enforcement proceedings against financial firms that have broken the rules. Whilst the regulators have been open about their intentions of giving financial firms breathing space to meet compliance requirements (and to fully adhere to the monitoring and oversight stipulations), the lack of actual enforcement activity has been very surprising indeed.
A slow start
Whilst watchdog organisations have reported dozens of alleged MiFID II breaches to the FCA, the agency has pursued relatively few of them. Some commentators believe that the FCA has failed in its duty to follow the spirit of the directive and punish noncompliance. An apparent laissez-faire attitude to enforcing the recording and monitoring requirements entrenched in MiFID II has led many experts to wonder whether this could be the beginning of the end of the legislation itself.
Only the FCA policymakers themselves know the true reasons behind this apparent sluggishness in enforcing MiFID II compliance. However, whatever the reasons, the broad lack of enforcement suggests to many that the regulations are struggling to deliver the robust reforms that were so badly needed following the 2008 financial crisis.
Worryingly, it is possible that MiFID II has morphed from a well-planned and intentioned market reform into yet another toothless regulation. However, there is another element that could well be playing an important role in all this – Brexit. With all the upheaval, it is of course also entirely possible that the regulators have deliberately kept their focus on consumer protection and are waiting for the most appropriate opportunity to make their move.
Whilst London has been the central financial hub for Western Europe for the last 10 years, Brexit means its future as Europe’s financial marketplace is uncertain. With negotiations continuing, Europe’s political leaders are looking for a suitable way in which the EU and the UK could interact through the London-based markets moving forward. However, if a suitable result isn’t found, the EU may be forced to revise its regulatory approach completely.
When the MiFID II financial regulations were developed the assumption was that they would cater for a wider consumer financial market than what will remain when the UK departs the EU. Depending upon the outcome of ongoing Brexit negotiations, this rule may prove unworkable for the new situation in mainland Europe.
With this in mind, it is highly possible that the FCA may be limiting the enforcement of MiFID II out of concern over causing unnecessary financial market upheaval during an already uncertain political and economic time in Europe as a whole.
Certainly, if you look at the facts the European authorities are already actively pursuing a number of actions and investigations to enforce requirements imposed by MiFID II. By February this year the FCA was investigating 48 investment firms for violating key cost disclosure requirements (up from the 34 investigations that were ongoing in October 2018).
It’s also fair to say that even the FCA is not particularly pleased with the current levels of MiFID II compliance. The more important question is what exactly can be done to improve this state of affairs?
The elephant in the room
Brexit really is the ‘elephant in the room’ when it comes to the question of enforcing MiFID II. Until the negotiations are finalised and the future relationship between the UK and EU is certain, there is no way of knowing how financial markets will be regulated across Europe.
Unfortunately, this means hundreds of thousands of people in the UK’s regulated financial services industry, and hundreds of millions of European financial consumers affected by current regulations,will be left completely in the dark in the meantime.
With few signs that the uncertainty surrounding Brexit will disappear in the short-term, there will continue to be a large degree of inaction on all sides. The regulators and financial firms are both holding their cards close to their chests, although it’s safe to say a resolution will be found eventually.
When the resolution is found however, any financial firms that are unprepared to enable their compliance quickly will be left bearing the greatest burden in the shape of hefty fines. In times of political uncertainty, the ability to adapt quickly is invaluable for any regulated organisation.
Like all regulations, compliance to MiFID II will undoubtedly herald winners and losers. Even from this point it is obvious that the certain losers in the future of European financial regulation will be those firms that are unwilling or unable to adapt to policy changes when they arrive.
Oil extends losses as Texas prepares to ramp up output
By Ahmad Ghaddar
LONDON (Reuters) – Oil prices fell from recent highs for a second day on Friday as Texas energy firms began to prepare for restarting oil and gas fields shuttered by freezing weather.
Brent crude futures were down $1.16, or 1.8%, to $62.77 per barrel, by 1150 GMT, while U.S. West Texas Intermediate (WTI) crude futures fell $1.42, or 2.4%, to $59.10 a barrel.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude oil production and 21 billion cubic feet of natural gas, according to analysts.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
However, firms in the region on Friday were expected to prepare for production restarts as electric power and water services slowly resume, sources said.
“The market was ripe for a correction and signs of the power and overall energy situation starting to normalise in Texas provided the necessary trigger,” said Vandana Hari, energy analyst at Vanda Insights.
Oil fell despite a surprise fall in U.S. crude stockpiles in the week to Feb. 12, before the freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about both nations returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons.
While the thawing relations could raise the prospect of reversing sanctions imposed by the previous U.S. administration, analysts did not expect Iranian oil sanctions to be lifted anytime soon.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” StoneX analyst Kevin Solomon said.
(Additional reporting by Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; editing by Jason Neely)
Analysis: Carmakers wake up to new pecking order as chip crunch intensifies
By Douglas Busvine and Christoph Steitz
BERLIN (Reuters) – The semiconductor crunch that has battered the auto sector leaves carmakers with a stark choice: pay up, stock up or risk getting stuck on the sidelines as chipmakers focus on more lucrative business elsewhere.
Car manufacturers including Volkswagen, Ford and General Motors have cut output as the chip market was swept clean by makers of consumer electronics such as smartphones – the chip industry’s preferred customers because they buy more advanced, higher-margin chips.
The semiconductor shortage – over $800 worth of silicon is packed into a modern electric vehicle – has exposed the disconnect between an auto industry spoilt by decades of just-in-time deliveries and an electronics industry supply chain it can no longer bend to its will.
“The car sector has been used to the fact that the whole supply chain is centred around cars,” said McKinsey partner Ondrej Burkacky. “What has been overlooked is that semiconductor makers actually do have an alternative.”
Automakers are responding to the shortage by lobbying governments to subsidize the construction of more chip-making capacity.
In Germany, Volkswagen has pointed the finger at suppliers, saying it gave them timely warning last April – when much global car production was idled due to the coronavirus pandemic – that it expected demand to recover strongly in the second half of the year.
That complaint by the world’s No.2 volume carmaker cuts little ice with chipmakers, who say the auto industry is both quick to cancel orders in a slump and to demand investment in new production in a recovery.
“Last year we had to furlough staff and bear the cost of carrying idle capacity,” said a source at one European semiconductor maker, who spoke on condition of anonymity.
“If the carmakers are asking us to invest in new capacity, can they please tell us who will pay for that idle capacity in the next downturn?”
The auto industry spends around $40 billion a year on chips – about a tenth of the global market. By comparison, Apple spends more on chips just to make its iPhones, Mirabaud tech analyst Neil Campling reckons.
Moreover, the chips used in cars tend to be basic products such as micro controllers made under contract at older foundries – hardly the leading-edge production technology in which chipmakers would be willing to invest.
“The suppliers are saying: ‘If we continue to produce this stuff there is nowhere else for it to go. Sony isn’t going to use it for a Playstation 5 or Apple for its next iPhone’,” said Asif Anwar at Strategy Analytics.
Chipmakers were surprised by the panicked reaction of the German car industry, which persuaded Economy Minister Peter Altmaier to write a letter in January to his counterpart in Taiwan to ask its semiconductor makers to supply more chips.
No extra supplies were forthcoming, with one German industry source joking that the Americans stood a better chance of getting more chips from Taiwan because they could at least park an aircraft carrier off the coast – referring to the ability of the United States to project power in Asia.
Closer to home, a source at another European chipmaker expressed disbelief at the poor understanding at one carmaker of how it operates.
“We got a call from one auto maker that was desperate for supply. They said: Why don’t you run a night shift to increase production?” this person said.
“What they didn’t understand is that we have been running a night shift since the beginning.”
NO QUICK FIX
While Infineon, the leading supplier of chips to the global auto industry, and Robert Bosch, the top ‘Tier 1’ parts supplier, both plan to commission new chip plants this year, there is little chance of supply shortages easing soon.
Specialist chipmakers like Infineon outsource some production of automotive chips to contract manufacturers led by Taiwan Semiconductor Manufacturing Co Ltd (TSMC), but the Asian foundries are currently prioritising high-end electronics makers as they come up against capacity constraints.
Over the longer term, the relationship between chip makers and the car industry will become closer as electric vehicles are more widely adopted and features such as assisted and autonomous driving develop, requiring more advanced chips.
But, in the short term, there is no quick fix for the lack of chip supply: IHS Markit estimates that the time it takes to deliver a microcontroller has doubled to 26 weeks and shortages will only bottom out in March.
That puts the production of 1 million light vehicles at risk in the first quarter, says IHS Markit. European chip industry executives and analysts agree that supply will not catch up with demand until later in the year.
Chip shortages are having a “snowball effect” as auto makers idle some capacity to prioritize building profitable models, said Anwar at Strategy Analytics, who forecasts a drop in car production in Europe and North America of 5%-10% in 2021.
The head of Franco-Italian chipmaker STMicroelectronics, Jean-Marc Chery, forecasts capacity constraints will affect carmakers until mid-year.
“Up to the end of the second quarter, the industry will have to manage at the lean inventory level,” Chery told a recent Goldman Sachs conference.
(Douglas Busvine from Berlin and Christoph Steitz from Frankfurt; Additional reporting by Mathieu Rosemain and Gilles Gillaume in Paris; Editing by Susan Fenton)
Aussie and sterling hit multi-year highs on recovery bets
By Tommy Wilkes
LONDON (Reuters) – The Australian dollar rose to near a three-year high and the British pound scaled $1.40 for the first time since 2018 on optimism about economic rebounds in the two countries and after the U.S. dollar was knocked by disappointing jobs data.
The U.S. currency had been rising in recent days as a jump in Treasury yields on the back of the so-called reflation trade drew investors. But an unexpected increase in U.S. weekly jobless claims soured the economic outlook and sent the dollar lower overnight.
On Friday it traded down 0.3% against a basket of currencies, with the dollar index at 90.309.
The Aussie rose 0.8% to $0.784, its highest since March 2018. The currency, which is closely linked to commodity prices and the outlook for global growth, has been helped by a recent rally in commodity prices.
The New Zealand dollar also gained, and was not far off a more than two-year high, while the Canadian dollar rose too.
Sterling rose to $1.4009 on Friday, an almost three-year high amid Britain’s aggressive vaccination programme.
Given the size of Britain’s vital services sector, analysts say the faster it can reopen the economy, the better for the currency. Sterling was also helped by better-than-expected purchasing managers index flash survey data for February.
The U.S. dollar has been weighed down by a string of soft labour data, even as other indicators have shown resilience, and as President Joe Biden’s pandemic relief efforts take shape, including a proposed $1.9 trillion spending package.
Despite the recent rise in U.S. yields, many analysts think they won’t climb too much higher, limiting the benefit for the dollar.
“Our view remains that the Fed will hold the line and remain very cautious about tapering asset purchases. We think it will keep communicating that tightening is very far off, which should dampen pro-dollar sentiment,” said UBS Global Wealth Management strategist Gaétan Peroux and analyst Tilmann Kolb.
ING analysts said “the rise in rates will be self-regulating, meaning the dollar need not correct too much higher”.
They see the greenback index trading down to the 90.10 to 91.05 range.
The euro rose 0.4% to $1.2134. The single currency showed little reaction to purchasing manager index data, which showed a slowdown in business activity in February. However, factories had their busiest month in three years, buoying sentiment.
The dollar bought 105.39 yen, down 0.3% and a continued retreat from the five-month high of 106.225 reached Wednesday.
(Editing by Hugh Lawson and Pravin Char)
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