Esma’s draft rules are set to be finalised in September
The full scope of the regulatory technical standards (RTS)under Mifid II are yet to be fully realised by the market, with further workneeded especially on trade reporting requirements, presenting a huge projectfor market participants.
Market sources have expressed concern over the slow pace ofwork by firms in preparing for trade reporting, with some likely to be leftbehind if the September deadline is met as expected.
The final draft of the European Securities and MarketsAuthority’s (Esma) Markets in Financial Instruments Directive (Mifid) II RTS isdue in September, with the current go live date for the rules slated for January1 2017.
While the market has been ramping up preparations, much moreneeds to be done, according to a source familiar, “the market is set for a rudeawakening; some firms have some catching up to do on the scope of tradereporting. This is a huge project and it seems that the wider market isstruggling to understand the breadth of the rules.”
The impending rules under Mifid II present a number ofchallenges across reporting and transparency. In a piece for FOW in April, Protiviti'smanaging director Bernadine Reese and director Stuart Campbell, said, “The mostsignificant operational change areas will be transaction reporting, tradetransparency and the effects of changes around product – particularly ondistribution. The new requirements for those who use algorithmic models todetermine investment decisions are also an area of concern.”
Indeed partner at law firm Vedder Price, Sam Tyfield, toldFOW, “There remain a lot of issues around the trade reporting, tradingobligations and authorisation requirements, i.e., what is a liquid instrument, thedifference in definitions between a CDF, equity swap, etc. and what counts as directelectronic access are important – it remains to be seen what scope particularrequirements will cover.”
Tyfield
Tyfield continued, “The data fields are going to require ahuge amount of work. The main issue I expect to see is that it is very hard tohave market-wide knowledge of regulatory requirements.”
A London-based source welcomed the increase in market preparationseen of late, though noted, “One thing to consider is the fact that the RTScould still change, the hope is just that rules do not get any worse for marketparticipants.”
Signs of preparation can be seen across the market, butTyfield suggested that more work to be done. “There remain a lot of issuesaround the trade reporting, trading obligation and authorisation requirements;what is a liquid instrument, The difference in definitions between a CDF,equity swap, etc. and what is DEA are important – it remains to be seen whatscope particular requirements will cover.
“There remain a huge number of imponderables; the marketdefinitely needs more clarity,” he added.
With change comes opportunity; as reported by FOW earlier this week, equities exchange group, Bats Chi-X Europe, is considering an extensionof its equity market trade reporting service to cover OTC derivatives, once theMifid II RTS are finalised.
“The market is doing its best to prepare for the impendingswathe of data field and other requirements, but there is more to be done andmore to learn from Brussels and Paris,” said Tyfield, “The news that Bats isconsidering an extension of its trade reporting functionality demonstratesthis; the market is working toward changes, but a lot of issues remain.”
Market preparation also includes the recent creation ofregulatory subgroups by standards body FIX Trading Community, to support itsmembers in meeting the requirements of Esma’s RTS.
FIX has created six groups: Clock Synchronisation; ReferenceData; Transparency; Best Execution; Microstructure; Order Data; and RecordKeeping.
Healey
Speaking to FOW on the new support network, Rebecca Healey,CEO of Incisus Group and co-chair of the EMEA Regulatory Subcommittee, told FOWlast week that more work is required to meet the Mifid II requirements.
“The original Mifid document looked at the bigger themes,while the level two text looks at how firms should take the text and implementit, and some unknown elements remain here,” she said.
Esma in July created its own committee to develop andprovide technical advice for the European Commission, with a particular focuson investor protection and preparing for Mifid rules.
Tyfield welcomed the establishment of the new groups,stating that the “industry-led initiatives shows the effort that is going intoboth interpreting the rules and planning for their implementation, from a botha practical and systems point of view.
“I think there is a good market understanding that thetechnology project that will be required is huge. Organisations such as FIX arewell placed as an independent body to support participants with this,especially when you consider the granularity of rules that protocols require,”he added.
Looking ahead, as reported by FOW last week, FIX’s Healey warnedthat there is a risk that the September deadline may still not be achieved,“there has been some disquiet in Europe about the latest proposals which couldlead to a date slippage to next year and ultimately further debate, which couldthen see a delay to Q1.
“Deadlines have passed before, there is always theopportunity for a delay. Regardless ofthis, firms are now looking at what they can practically do now,” she added.
While the market can speculate about a potential delay tothe September target, Vedder Price’s Tyfield said, “I remain hopeful that wewill see the draft RTS in September as planned; the market is hoping that theCommission will not come back with extensive comments as that would certainlycause a delay.”
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