MiFID II Delay Moves a Step Closer

By Rebecca Healey, TABB Group

Originally published on TABB Forum

After weeks of speculation, news broke that the European Commission is contemplating a year-long delay to the implementation of MiFID II. This is no guarantee, though, as the Commission can only implement this with the agreement of both the European Parliament and the Council, and European MEPs in particular appear in no mood to acquiesce. The question is: What now?

After weeks of speculation, news broke that the European Commission is contemplating a year-long delay to the implementation of MiFID II. This is no guarantee, though, as the Commission can only implement this with the agreement of both the European Parliament and the Council, and European MEPs in particular appear in no mood to acquiesce.

The question is: What now? If MEPs believe that the ESMA interpretation of the Level 1 text is truly a step too far, are we really back to the drawing board? And what implications will this have for capital markets in Europe?

According to the FT, the European Commission has now accepted the need to postpone the implementation of MiFID II from January 3rd 2017 by possibly a year due to the level of complexity involved as well increasing concerns that the necessary technology will not be in place in time

The director in the EU Commission’s financial services department, Martin Merlin, admitted to members of the European Parliament that:“maybe the simplest and most legally sound approach would be to delay the whole package for one year,” adding that a delay was needed, “If we want to have a smooth and effective implementation.”

This admission follows weeks of market speculation about a possible delay. First raised by the Investment Association back in September, the industry has been clamoring for a sufficient delay given the complexity of the proposed Regulatory Technical Standards, particularly in relation to the transparency rules for non-equity markets.

Subsequent warnings were issued by Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA), that the timetable for IT systems development is too tight for the regulators themselves, let alone the industry:

“I am not going to surprise anybody in the room when saying that the timing for stakeholders and regulators alike to implement the rules and build the necessary IT systems is extremely tight. Even more, there are a few areas where the calendar is already unfeasible. This relates to the fact that it will take some time, and well into 2016, before the text of the RTS will be stable and final. The building of some complex IT systems can only really take off when the final details are firmly set in the RTS and some of the most complex IT systems would need at least a year to be built.”

European Parliament Reacts

The response from MEPs was predictably swift. Tension has been mounting between Parliament, ESMA and the Commission in what is rapidly degenerating into a blame game. Markus Ferber stated in a conference last week that a delay was increasingly likely both in release of the Commission Delegated Acts and the finalization of the RTS, but laid the blame for any delay firmly at the feet of ESMA and the Commission.

What is of more concern, though, are the distinct gaps that appear to be emerging between MEPs and ESMA on a more fundamental level. Kay Swinburne recently highlighted her frustration with ESMA’s interpretation of the implementation of MiFID II, stating that a number ofrules are likely to be sent back for redrafting. However, the question is the extent to which the rules require changing. Swinburne’s view is that ESMA has not met its obligations in relation to the Level 1 text, and she would appear to be suggesting a more wholesale review of a number of factors – such as the definition of liquid markets and SSTI, as well as data requirements around best execution – rather than a few minor amendments and moving the implementation date:

“I would prefer us to do it correctly even if it takes longer, but I need confidence in the system that a delay means better data, that can be used for and possible testing or modifying of some of the pre- and post-trading transparency regimes proposals.”

This now is not only a delay but potentially significant changes to the rules that will leave market participants in further confusion. There will be intense pressure by some to ensure that only the date is delayed and this does not open the floodgates to amendments to the Level 1 text. While the Commission has stated that it is looking to propose a limited legal revision to ensure MiFID does not unravel, the key will be keeping all parties on track.

We have already had first-hand experience of the impact of the public disagreement between the FCA and AMF as to the outcome of Investor Protection rules on payment for research; firms unable to decide whether the UK or France would emerge victorious simply put the break on further development. Hence the precarious balancing act – too long a delay and endless further discussion would sap momentum from MiFID II development projects; but we have to get it right. There can be only one delay – repeating this would be a disaster. Regulators and politicians need to reach agreement on this, and fast.

So What’s Next for Your Firm?

The reality is that, while the European Commission has informed the Parliamentary hearing of its preference for a delay, we are not there yet. This still has to be ratified by the Parliament and the Council, and until it is, the regulators have advised of the need for the industry to continue working to the current deadline of Jan. 3, 2017.

While the temptation by some is to smirk at the regulators’ fate, that will be a pointless exercise. We can all berate certain parties for not doing enough, but that also must include members of our own industry. By the Commission and ESMA stepping up and recognizing the necessity to delay implementation to meet the complex requirements of IT systems, rather than continuing to press ahead regardless, the industry has a second opportunity to engage and provide constructive assistance rather than criticism from the sidelines.

As Kay Swinburne states: “Any wholesale delay needs to be accompanied by a plan to use the extra time to further calibrate and better model and pre-test the proposed changes to our capital markets.”

It’s time for European market participants to step up and be counted.