Only two years after MiFID II came into force, a variety of challenges are already looming and are likely to change the current state of the regulation. This article looks into how MiFID II is going to be adapted to meet these challenges.
MiFID II – a rigid regulation struggling to keep up with political and business challenges
The uncertainty around the United Kingdom’s departure from the EU raises ever more questions about the post-Brexit regulatory landscape. With or without a deal, Brexit means that the largest European financial market no longer has to play by the same rules as its EU counterparts. Will this split financial landscape lead to a power grab as ESMA and the FCA struggle to retain control over their domains? Or will it instead trigger a much-needed reform of the third-country rules for financial reporting?
Member states are also raising their voices about the way MiFID II has been implemented, with the German market players complaining about a too-strict interpretation of the Directive. "MiFID II has gone to extremes from my point of view. And I have a lot of sympathy for the fact that MiFID II is critically questioned by the German banks", says Bafin boss Felix Hufeld at an event of the International Club of Frankfurt Business Journalists.1
Germany’s Ministry of Finance seems to listen to these industry complains. After a consultation with some of the dissatisfied parties, the Ministry of Finance increased its political pressure by conveying to Brussels what is sees as a number of necessary amendments and revisions to MIFID II.
Most MiFID II review reports are expected to come during 2020.2 It can already be assumed that Brexit, the complaints by the financial industry, and political pressure is going to persuade the European Commission to adjust regulation and sketch the road to MiFID III.
Amendments to MiFID II requested by the industry and politicians
- ToTV concept for OTC derivatives: Transaction and transparency requirements apply to instruments that are traded on a trading venue. This concept works for standardized instruments. For non-standard OTC derivatives, the “traded on a trading venue” (ToTV) concept is very doubtful because they are deemed to be ToTV only if they share the same reference data details as standardized instruments (FIRDS - The Financial Instruments Reference Database). Firms are asking for an easier and more transparent ToTV concept for OTC derivatives.
- Share trading obligation: The share trading obligation is not clear enough and leads to legal uncertainties. Firms request modifications that should be focused on shares listed in the EU. Trading obligation on non-EU shares should be applicable in very limited and clearly defined cases. This matter will be even more urgent after Brexit.
- Quality of reference data: The Financial Instruments Reference Database (FIRDS) is still not fully accepted by the industry as the golden source for reference data. Therefore, the industry requests an analysis of how to ensure the provision of accurate, reliable, and timely reference data. This will be even more important in the case of a hard Brexit, as FCA plans to run its own UK FIRDS.
- Market structure: Competitive conditions between different types of trading venues and systemic internalisers are not considered as equal by the industry. For example, Art. 49 (1) MiFID II (tick size regime) does not apply to Systematic Internalisers directly. The market structure should be subject to a comprehensive analysis. There is a request to re-calibrate tick size regime and standard market size.
- Proportionality: The industry and politicians request a re-evaluation of the proportionality of MiFID II. Do non-profit organization with minimum trading activities (natural hedge) really require a LEI? Do small regulated markets with simple trading models have to fulfil complex high-frequency trading regulation requirements?
- Cost of market data: Apparently, MiFID II leads to a huge demand for market data. The industry is complaining about too costly services from data providers and is asking for an assessment of their price policies by competition authorities.
- Harmonization of regimes: Transaction reporting under MiFID II, EMIR, SFTR, and Short Selling regulation should be reviewed and analyzed to identify duplications and overlapping in order to harmonize the regulatory landscape. For example, some firms still fail to populate their own LEI in MiFID II transaction reports.4 This shows a fundamental lack of understanding of the regulation. The use of IDs like UTI, LEI, UPI, and ISIN should be re-assessed.
- Deferred post-trade publication: According to MiFID II, NCAs can authorize investment firms to defer the post-trade publications of non-equity transactions. This leads to a lack of consistency across EU and needs to be harmonized.
- Professional clients: Professional clients have different levels of experience and information systems to help assess the cost and charges of transaction. The industry is crying for a change to these rules and is asking for lower cost of information requirements for professional clients.
- Taping of telephone calls: Recording requirements laid out by Art. 16 (7) MiFID II cause high costs and raise data privacy concerns. There are indications that the taping obligation violates the General Data Protection Regulation (GDPR) rules.
- Product governance: Periodic review of simple financial instruments should be omitted as such instruments do not change their structure and payment profile over their lifetime.
- Introduction of experienced retail clients: The industry suggests implementing simplified rules for a new category of experienced retail investors.