MiFID II AND MANAGING UNCERTAINTY- NO REST FOR THE UNDECIDED.

Silvano Stagni, global head of research at capital markets consultancy, Hatstand considers the recently announced delay to MiFID II and warns against complacency.

Let’s start with a disclaimer. I shall refer to the MiFID Review – encompassing MiFID II and MiFIR – simply as MiFID II to simplify matters. This is not formally correct but easier.

MiFID II is coming but we are not sure when. There is a consensus that January 3rd, 2017 was beyond ambitious. There is also agreement that there are details in both the Directive and the Regulation that still require clarification. We also know that the Delegated Acts promised for December 2015 may be published prior to the end of January 2016 but there are no guarantees.

A deferment of the implementation of MiFID II is now certain. There are rumours of a twelve months’ postponement (as in January 2nd, 2018) but European bureaucracy moves very slowly.

Everybody, from ESMA to every affected firm, sees the need for a deferment. 3rd January 2017 was perceived as impossible, and therefore national competent authorities would have exercised some level of flexibility when assessing delayed compliance. On the other hand, the extra time gives a tight but not unachievable timetable for compliance.

This however requires keeping the foot on the pedal. MiFID II will bring about changes to current business models, operations and technology. Implementing those changes requires detailed planning and the taking of many strategic decisions prior to the clarification of all the details and the determination of all the deadlines.

MiFID does not exist in isolation. Investment firms’ transaction reporting will provide information needed to meet some requirements of MAD II/MAR (the Market Abuse Directive/Regulation), the Securities Financing Transaction Regulation and more.

The European Long Terms Investment Fund (ELTIF) regulation will also require specific information from MiFID. If an investment firm has an ELTIF as a client it needs to ensure that it can limit its portfolio to the types of financial instruments permitted to an ELTIF.

Transaction reporting for EMIR is due to change. The final report of the changes is currently being examined by the European Commission with a deadline for approval around late February/early March 2016 and a potential implementation date sometime in the first half of 2017. A financial firm will have to consider those changes in EMIR if it wishes to avoid double reporting by using a Transaction Repository as an Authorised Reporting Mechanism (ARM) under MiFID.

All investment firms, regardless of size, have to cope with a large amount of regulatory change. There is little choice around these changes and they put considerable pressure on budgets. The temptation to concentrate on the next deadline at the expense of all else is huge. This is not the best way to optimise effort and save on costs.

Regulators tend to see ‘their’ deadlines in isolation and, so far, have not shown any sympathy for any financial organisation with a huge amount of change to have to undergo. This is particularly true for those organisations not currently subject to a supervision regime. They will have to seek authorisation for the first time if they fall under the remit of one regulation or another, such as those who trade in some instruments classified as commodities by MiFID II (e.g. freight rate futures).

Returning to MiFID, many of the required changes need thought and planning before implementation can start. An ill thought out, rushed decision to start work may result in a far more costly project than anticipated in both financial and organisational terms.

Firms that run derivative trading platforms will, for example, have to choose whether to register as a venue (OTF or MTF) or not. Each possible alternative will have its own costs and benefits. Assessing them thoroughly prior to implementation saves time, effort and money. This can be done now based on the known Level 1 Principles and their details.

Many organisations reacted to the rumours of a deferment of the date for the implementation of MiFID with a huge sigh of relief. Unfortunately that sigh of relief led to a loss of a sense of urgency in many instances. MiFID is not going away. A twelve months’ deferment and an inflexible attitude to delays does not actually buy a lot of time.

Taking the foot off the pedal may prove to be a costly mistake.

[divider_line]©BestExecution 2016

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