Back in November, with just over 13 months to go until the scheduled implementation of the Markets in Financial Instruments Directive (MiFID) II, the European Securities and Markets Authority (ESMA) said what many market participants were thinking, and asked the European Commission to consider a delay.
ESMA chair Steven Maijoor said work on the directive was “by no means finished”, and suggested that, with the final draft technical standards yet to be finalised, market participants cannot finalise their plans for compliance. He said: “The timing for stakeholders and regulators alike to implement the rules and build the necessary IT systems is extremely tight. Even more, there are a few areas where the calendar is already unfeasible.”
At the time of writing, the European Commission has not given a definitive response, although the European Parliament has said it is “ready to accept a one-year delay” provided the commission “finalises the impending legislation swiftly”, and many are all but relying on approval.
Cian O’Braonain, head of regulatory response at Sapient Global Markets, goes as far to say: “For some banks it will be a huge relief as a delay had essentially become their plan A, while plan B was working to the original date.”
Even within a more reasonable timeframe, the challenges MiFID II poses are significant. Jeremy Taylor, head of business consulting at GFT, says: “MiFID II is a monster. It exponentially increases the number of financial instruments that are captured, compared to MiFID I.”
Which leaves institutions trying to figure out exactly what to do now. O’Braonain, approaching from a trade and transaction reporting perspective, focuses on the commitment firms have made to the project already.
He explains: “A lot of the bigger banks have already set up their project teams. They will have a huge degree of frustration because they have resourced big teams, allocated a huge amount of budget and will now be in this uncertain situation.”
On the other hand, Brian Lynch, CEO of Risk Focus, accepts that “the idea of a delay is welcome”, even though Risk Focus’s product is geared towards helping firms meet the tight deadlines for complying with the reporting, reconciliation and transparency aspects of MiFID II. Through his own contact with the industry, Lynch predicts that institutions will embrace a deadline extension.
He says: “For us it is bitter sweet—a certain level of urgency can help our sales process, but for our clients the pressure has been reduced.”
“These organisations that have so much on their plates. We might recommend that firms already underway with their MiFID II build should keep going, but realistically, that’s unlikely. There is a long list of regulatory imperatives firms have to meet this year, and if they can get some breathing room, they’ll take it.”
Lynch also notes that investment fatigue is a factor, specifically relating to regulatory change, suggesting that when there is a chance to take a step back, for firms to continue at the same pace of investment is unrealistic. However, he also warns against shutting down projects altogether.
He says: “If people completely mothball their projects and then try to reopen them in 12 months’ time, there’s a real risk that they’re going to have the same level of anxiety later on and, again, there’s not going to be enough time for the next deadline.”
“There’s a balance to be struck, and I do fear that some firms will fall on the wrong side of that balance and do nothing until it becomes a burning issue once again.”
Taylor has less interest in such a balance, suggesting instead that banks should continue with their projects, giving them a chance to comply more quickly and more efficiently, while taking advantage of any business opportunities that the directive might bring.
He says: “A delay gives them time to properly prepare for this change. It’s a golden opportunity to look at their business and operating models, to decide what kind of entity they want to be, and what kind of interactions they want to have with the market and with their clients.”
“A lot of our clients have probably been pondering this for quite some time already, but they have been more concerned about the very short window of time in which to implement regulatory change. The have been in a rush to get over that line and tick the compliance box.”
He adds: “Quick decision-making isn’t necessarily the best decision-making.”
O’Braonain is in agreement, saying that “the only option you have is to keep going, full steam ahead”, and that to put implementation plans on hold could “lead to some significant problems further down the line”.
He also points out the relative significance of this for smaller institutions, saying: “I don’t think the tier-one banks will be affected so much, although it will still be a challenge. They can find the budget and resourcing. It will be the smaller banks that are less well resourced to respond.”
It’s also unclear what effect a delay to MiFID II could have on institutions’ compliance timelines. Taylor points to regulations such as the Basel Committee on Banking Supervision (BCBS) Fundamental Review of the Trading Book (FRTB) and other initiatives due to come in to force in 2018 that require development of new credit management and risk models.
There may not be direct overlap in the parts of banks affected, but Taylor suggests that there is some interdependency. If nothing else, resources could be stretched if banks get lax on their time management.
He says: “There was very little time to implement MiFID II before. Now there is more, but it’s still not a lot. If banks delay until 2017, then that is going to be a nightmare year; IT resources, change management resources, compliance resources and risk function resources are going to be really tied up with things like FRTB.”
He suggests that banks approach the challenge “holistically and more broadly, so that the resource curve is much smoother”, adding: “Everyone needs to re-plan accordingly.”
Lynch, however, argues that, in fact, with so many regulatory obligations to deal with, having a bit of extra time to deal with one of the biggest can only be a bonus, allowing firms to divert resources to where they’re most needed at any given time.
His concern is that firms may not be able to keep the attention of those controlling their regulatory financing. He says: “If firms delay too much or take their eye off the ball, they could struggle to get the investment dollars from the relevant investment committees.”
“These committees could see it as a 2018 problem, even though it’s an early 2018 problem. In 2015, anything with a 2018 label on it seems like a long way off.”
Even if banks could cobble together a solution in time for January 2017, there’s no guarantee that the regulators will be ready for them. As a directive, MiFID II requires national competent authorities to produce their own rules. Implementation will mean collecting and analysing significant volumes of data—a task they’re unlikely to be up to.
O’Braonain suggests that the industry is “not even remotely close to being ready”, and that this applies to ESMA, too.
He says: “This is more [ESMA] just being really worried about [its], and the national competent authorities’, ability to manage the huge amount of data they will receive and need to monitor and analyse.”
Taylor adds that, while European regulators don’t want to appear to be going soft, there is, again, a balance to be struck. He suggests regulators might not have their rules ready until half way through 2016.
He says: “European legislators don’t want to be criticised by their US counterparts for being slow and for being soft on the industry, but this is a practical, pragmatic proposal, and I don’t think they’ve got any choice. It would be an absolute disaster if they pressed ahead with an unrealistic timeline.”
“When a regulator themselves says this can’t be done, that’s very much a transparent and honest assessment.”
And Lynch is in agreement, saying: “The national competent authorities, and the regulators that ultimately will need to consume and manage this data, need a delay. They are not ready and they’re not going to be ready by January 2017, they have stated as much.”
According to O’Braonain, however, with a 24-month time frame comes a temptation to relax. “That’s incredibly dangerous,” he says. “Because the extra time should be used to understand the complexity, the IT requirements and also for testing and re-testing to ensure reporting completeness and accuracy.”
With an extra year for implementation comes the expectation that when MiFID II is introduced, firms should have their compliance solutions sussed, and that regulators will have less sympathy for those that don’t.
“The tolerance for failure … will be significantly reduced,” says O’Braonain. “That, in turn, could see any non-complaint firms fined at an earlier stage.”
He adds: “In lieu of any official announcement, our advice is simple: keep going with the original date in mind until you hear otherwise.”
Taylor agrees with this sentiment, adding that no institution affected should “take their foot off the gas”.
He says: “That includes market participants, the European Commission and ESMA themselves, and the national competent authorities who have got to get their infrastructure and their systems in place as soon as possible.”
Taylor concludes: “Market participants shouldn’t be breathing a sigh of relief, because there’s no avoidance in delay. They have still got to do this and it’s still going to be painful.”