The rewriting of Mifid II trading rules will lead to an “inevitable” delay of the regulation, experts argue.
Last week, the European Commission sent sections of Mifid II trading rules back to Esma be rewritten, saying the latest drafts were not “up to standard”.
The Commission told the European Parliament’s Mifid II negotiating team and Esma to revise the non-equity transparency, ancillary activity exemption and position limit rules.
Michael McKee, the head of financial services regulation at global law firm DLA Piper, says the European Parliament’s rejection of three of the technical standards will be “of some concern to the industry”.
He says: “The clock is ticking on implementation and this announcement will inevitably delay the finalisation of the standards.
“The real risk is that now the industry will not know the final position [of Esma] until later in the year. This will have implications, especially for those who are more affected by the [rewriting of the trading standards], such as commodity firms.”
Non-equity transparency is a regulatory standard related to bonds. It’s about ensuring that the details of the transactions in liquid instruments are published to the wider market.
Ancillary activity exemption deals with commodities trading and allows businesses that aren’t financial companies to trade commodities derivatives without having to be an authorised investment firm.
“Perhaps the complexity of certain aspects of Mifid II has reached the point where the proposals are unworkable,” says Ash Saluja, a financial services partner with law firm CMS.
“The authorities have been looking at transparency in the bond markets for at least a decade now and they still can’t reach an agreement.
“Might it have been better to start with a narrower scope that could have been broadened rather than trying to be all encompassing at the outset and risk damaging the markets?”
McKee says while the European Parliament is comfortable with the main measures, this move signals it “wanted to make a political point especially around the position limits”.
Position limits are about reducing systemic risk in derivatives trading and preventing “disorderly markets”, explains gbi2 founder Graham Bentley.
The limits restrict the net position that an investor can hold in commodity derivatives traded on a market. This is to prevent potential excessive speculation on soft commodities, for example wheat and other foods.
Despite the likely delay to the technical standards, experts say the rewriting of the proposals is unlikely to delay the implementation of Mifid II further, which has already been postponed from January 2017 to January 2018.
Bentley says: “Esma, whose consultation process led to the proposals, has had its knuckles rapped by the politicians. Esma knew the parliament’s expectations and haven’t delivered as tough a set of rules as was required.”