Jeremy Taylor and John Downing, GFT
The MiFID II ‘monster’
The 27th September 2015 was the day when the 1,285 pages of MiFID II technical and implementing specifications, plus the revised cost / benefit analysis arrived on our electronic doorsteps. I think it was also the day when we collectively realised that what we had feared was in fact becoming a reality: that this regulation was much bigger and more complex than we had ever anticipated.
The specificity of all three documents spelt out in excruciating detail the ways in which MiFID II was going to be required to be implemented by all of the banks in Europe. It shouldn’t have been too much of a surprise; the concern was simply the enormity of the job facing us all across the industry. All that was missing was any deviation in the expected delivery date – 3rd January, 2017. The banks were also being told by the regulators that the date was fixed, that there was no time to renegotiate any Level 1 or Level 2 changes, and that there were more specifications to come.
ESMA requests a delay
Imagine our surprise then, when on the 10th November, Steven Maijoor, the Chairman of the European Securities and Markets Authority (ESMA) delivered a statement to the Economic and Monetary Affairs Committee (ECON) at the European Parliament requesting a delay to the implementation date. He cited that the timing for stakeholders and regulators alike to implement the rules, and build the necessary IT systems, was going to be “extremely tight”, and that there were already a few areas where the calendar is already unfeasible. This related to the fact that it will be well into 2016 before the complete text of the regulatory technical standards (RTS) will be stable and final. The building of some of the complex IT systems can only really start when these final details are firmly set, and most of the required IT systems will then need at least a year to be built, tested and commissioned.
The notes that accompanied his delivery (dated 2nd October – just one week after the publication of the initial RTS), makes reference to this possible delay by stating that “in the last couple of months, it has become evident for ESMA and National Competent Authorities (NCAs) that it will not be feasible to have those systems ready for 3rd January 2017.” So, it seems that way back in the early summer of this year, there was already the realisation that the January 2017 date was not feasible. His note also covered some of the technical and legal details to be considered, along with three scenarios for deferring the implementation date.
A period of uncertainty
We are now, therefore, in a period of great uncertainty, whilst ESMA and the European Parliament decide which of the three alternative scenarios is the best possible outcome for the European Parliament, its ECON, ESMA, the NCAs, and the financial services industry in Europe as a whole.
Following the publication of the note, subsequent press and media reports are starting to give credence to probability of a delay. We believe that any delay would be greeted by the regulatory bodies and the affected banking firms with equal sighs of understanding and relief. It would give us all more time to do it right, first time, with no compromise. All other legislation and regulation which would be affected by such a change in implementation date would, by necessity, also need to be adjusted so as to bring a harmonised approach to such a delay.
How best to use whatever additional time is provided?
In no circumstances should we take our collective feet ‘off the pedals’. We have already firmly pushed to the floor to get our arms around this regulatory monster. We need to continue to read the small print in all of the 27 work streams (if available), and determine which instruments we will want to trade in and how and where these trades will be settled.
Given the exponential increase in instruments now within the mandate of MiFID II (collectively maybe 15,000,000 unique instruments), the increase in transparency (pre-and-post-trade, and transaction, reporting), and improved investor protection (professionals treated like retail clients in some respects), now is the time to determine how all of our operating models will change, across all asset classes.
The traditional vertical functional silos in our back and middle offices can and should be aligned horizontally to simplify the processing. The fluid nature of whether an instrument is ‘liquid’ or ‘illiquid’ will very likely cause major interruptions in their treatment in the back and middle office spheres. The need to reconcile trades, positions, profit & loss, and risk with a CCP, non-CCP, and regular OTC could in fact significantly increase the operational risk in settling and managing the events in the life of all derivative trades.
Any pause will also allow valuable extra time to review new technologies, to see if they can provide any benefit in creating a MiFID II solution going forwards.
A fundamental change for all participants
An important point to note is that this request for an implementation delay has come from the regulators for the benefit of the regulators, who have accepted that the infrastructure they require to support the regulation is epic in its proportions, and will take longer to build if it is to meet its objectives. It is also vital in ensuring that data shared between NCA’s ensures that limits and caps are correctly set.
This provides market participants with the best evidence yet that this piece of regulation will fundamentally change the way that firms interact with one another, the market and clients. Major business and operating model decisions need to be made quickly, and feasibility studies completed on how best to adapt to the new rules. There are choices to be made on whether to become Multilateral Trading Facilities (MTF), Organised Trading Facilities (OTF), Systemic Internalisers (SI), or some combination of all three. This implies material change to the way trades are captured and piped to downstream systems for processing and reporting.
All in all, despite the appearance of more time being made available, it is vital that firms conduct a full impact study now in order to give themselves sufficient time to build and adapt their business and system architectures in time.
As such, a quote from a classic Greek tragedy resonates perfectly and rings true for MiFID II; “There is no avoidance in delay”, meaning that firms should keep their feet firmly on the accelerator!