Jeremy Woolfe: MiFID II crystal ball still clouded over

Estimates for the publication of the ‘delegated acts’ rules for MiFID II remain unclear, Jeremy Woolfe writes

Estimates for when the European Commission will publish the ‘delegated acts’ rules for the Markets in Financial Instruments Directive (MiFID II) remain unclear. Indications are that there will be an adequate interval for the IT-compliance exercise by portfolio managers to meet the new implementation date of 3 January 2018.

The most optimistic report on the streets of Brussels has it that the European Commission will have completed its work on MiFID’s Regulatory Technical Standards (RTS) before the summer holiday. This would leave a generous margin of time for fund managers to deliver their compliance work on time. Unsurprisingly, when challenged on this timing, the Commission avoids fixing on a firm date.

However, it does state: “We are working to finalise the rest of the level II package in the coming months. We will adopt and send RTS for scrutiny [by the Parliament and Council] as soon as they are ready (rather than sending them together).” Cautious to the last, the Commission also covers itself by adding: “At this stage, there is no legal deadline by which the Paris-based European Securities and Markets Authority (ESMA) has to propose amended drafts”.

But other commentators are less optimistic on the clearance by Brussels of the supplementary rules. One large pension fund investor reports that it would not be surprised to see the Commission publish the RTSs as late as October. Another source comes up with a similar timing, “bearing in mind past experience”. Such is sensitivity in the field that both authorities prefer not to be identified.

On top of an October estimate, even if further delay of 3-6 months were required for clearance by the Parliament and Council prior to publication in the Official Journal, there does still appear to be time for compliance procedures to be effected. Michael Lewis, MiFID expert at law firm Pinsent Masons, puts the time needed for IT sections to build, implement and test their compliance systems to be in the order of nine months. The work would include coverage of transaction reporting, which would have to be done electronically, he tells IPE.

But is there any need to worry about the time factor? “Hard to say,” says Lewis. “It depends on what comes out of ESMA and how substantial the delegated acts are. It is very difficult to crystal ball at this stage.” He does find the present one-year implementation delay to be much welcome in the investor sector.

While many of the 28 RTS articles will not require IT system development, Lewis notes that fund managers could well face having to build IT systems to cope with so-called “appropriateness”. He foresees the possibility of an expansion of scope from what exists under MiFID I. He expects that smaller pension funds will have to buy in the necessary IT development for consultancies. It remains to be seen whether such costs could be absorbed internally or passed on to the pension beneficiaries.

In the meantime, the issue of derivatives trade transparency, which first arose last year, has been highlighted by PensionsEurope. The institution states that, under current MiFID rules, as drafted by ESMA, pension funds could be discouraged, by the expense, from hedging inflation or interest-rate risk against long-dated liabilities. The liquidity definition for many derivatives sub-classes is of fewer than 10 trades taking place during a one-day period, it adds. It comments that ESMA mis-designated illiquid derivatives sub-classes as liquid. The trades-per-day threshold for determining the liquidity of derivatives sub-classes should be set cautiously. PensionsEurope’s Ursula Bordas questions whether the authority has made a mistake in this matter, which she judges to be not less important than the compliance-timing matter.

Taking a similar line on clearing venue calibration of liquidity, Roger Cogan, head of European public policy at the International Swaps and Derivatives Association, says: “We remain concerned that 10 trades per day – one trade per hour – is a very low bar for designating derivatives as liquid for the purpose of applying trade transparency requirements.” At the time of writing, the Commission declined to comment on the matter but has been under pressure from the US authorities to come into line with them on derivatives clearance.