13 April 2016

IPE: MiFID II crystal ball still clouded over

Estimates for when the European Commission will publish the ‘delegated acts’ rules for the Markets in Financial Instruments Directive 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 ESMA will complete 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 European Commission avoids fixing on a firm date.

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.

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