The Final Countdown to MiFID II - Unanswered Questions, Uncertainty, and Some Opportunity
In just three months, the MiFID II regulatory regime will come into effect for European financial markets, bringing with it a number of significant changes. These include the derivatives trading obligation (DTO), which will move over-the-counter (OTC) trading in liquid derivatives onto organised trading venues, and significant alterations to pre- and post-trade transparency, which will have far-reaching impacts on market structure and compliance burdens.
However, as the deadline rapidly approaches, several issues still require clarification, such as which financial instruments are subject to MiFID II / MiFIR, the ongoing concern around the specific definitions of the parties to a trade, and the impact of pre- and post-trade transparency.
To help shed some light on those issues, Waters Technology and Tradeweb recently hosted a webinar called “MiFID II and the Changing European Market Structure". Following are highlights of the conversation between moderator John Brazier, deputy editor at Waters Technology, and Marcus Schüler, managing director, head of regulatory affairs and market structure at Tradeweb.
John Brazier: We’ve taken a quick poll to determine the current state of readiness for MiFID II compliance in our audience, asking them: “Will you be in compliance with your MiFID obligations come January third?” Just over half said they will be in compliance with most of the requirements and 25% said they will be in compliance with all requirements, but 10% said they will not be ready. What do you make of these results?
Marcus Schüler: With less than 100 days left till the go-live date, a significant number of larger questions are still unanswered and uncertain, such as the definition of “Traded on a Trading Venue” (ToTV), which sets the scope for many of the major MiFID II requirements. Although some clarification is expected from ESMA of some points, some uncertainty will probably remain.
Brazier: Can you elaborate on this “definition of ToTV” issue?
Schüler: The majority of MiFID II / MiFIR requirements apply to transactions in financial instruments that are “traded on a trading venue”. Whilst “ToTV” is hence a hugely important concept, its definition and format were only recently clarified by ESMA. However, we still don’t know whether the ToTV concept needs to be applied real time or whether market participants can rely on the so-called RTS23 list of instrument reference data that is published by ESMA. Furthermore, there is no certainty about what instruments trading venues will make available for trading.
Brazier: Do you think there’s been enough coming out of the regulators around this issue or do you think the uncertainty will continue to create a headache for the industry?
Schüler: Despite some recent clarifications and changes, the open questions around the systematic internaliser status of liquidity providers remain, particularly around firms’ ability to opt in before September 2018. This is further exacerbated by the fact that, at least publicly, we’ve heard little from firms on what they plan to do. Originally, the marketplace expected regulators and/or ESMA to produce a granular systematic internaliser list, but lately it has become clear that this will not happen, at least not for the foreseeable future.
Brazier: We’ve also heard quite a bit about the derivatives trading obligation – what do you see as the impact of the DTO from your perspective as a trading venue?
Schüler: ESMA has not published its Final Report and Draft RTS in relation to the DTO yet. However, timing is still somewhat up in the air, as it is closely tied to the question of whether equivalence between U.S. and European trading venues will be reached before the January implementation deadline. Given that the DTO has already been in place in the U.S. for a number of years, and also that ESMA has tried to harmonize the scope of the European DTO with what’s already in place in the U.S., one could think that if equivalence is granted in time, this issue could be cleared up quickly.
Brazier: What ultimate impact do you see the DTO having on the marketplace from a client perspective?
Schüler: One of the biggest challenges firms will face with regard to MiFID II compliance is electronic timestamping, and also how to capture information transmitted via chats that lead to a transaction. There is little doubt that several MiFID II requirements – such as the record-keeping obligation – will be strong drivers of further electronification of workflows. This is because, to comply with these requirements, you will need to electronically capture all the steps in the dialogue between client and dealer and create an audit trail around it. Either electronifying the workflow or trading electronically on a venue are necessary steps to get there.
Brazier: Is there a possible area of opportunity or a benefit that the markets will get from MiFID II?
Schüler: The new regulatory regime will definitely cause some changes, and it will also create some opportunities. The additional transparency from all of the new reporting requirements will open up the door for new trading strategies, bigger volumes and increased activity. Given the challenges everyone is facing, it is crucial for us as an industry to work together and help each other to develop a view on certain questions that have been addressed by the regulators. That collaborative effort should also have a net positive impact on the industry as a whole.
MiFIR Article 28 and RTS 4 introduce the obligation for European firms to trade specified types of liquid interest rate and credit derivatives on organised venues rather than bilaterally with a broker, via phone or chat. Permitted trading venues will include Regulated Markets, MTFs (multilateral trading facilities) and OTFs (organised trading facilities).
As a long-standing operator of electronic marketplaces around the globe and in compliance with a variety of regulatory frameworks, Tradeweb is ideally placed to help its clients navigate the evolving Trading landscape in Europe under the new rules.