Happy New Year and welcome to the Year of Regulation, aka the Year of the Dog and, for some capital markets participants struggling to stay abreast of regulatory requirements, the Year of Anxiety. At the top of the agenda are Markets in Financial Instruments Directive II (MiFID II) and Markets in Financial Instruments Regulation (MiFIR), which go live today despite a few hiccups and gaps in the specs.
Also taking effect this week are Benchmarks Regulation, and Packaged Retail and Insurance based Investment Products (PRIIPs) regulation. These regulations will be followed in May by General Data Protection Regulation (GDPR) and towards the end of the year by early reporting under Securities Financing Transactions Regulation (SFTR).
The compliance deadline for the Fundamental Review of the Trading Book (FRTB) has slipped from January 2019 to January 2020, and it may slip further, but its complex requirements and capital calculations also need ongoing commitment to implementation. You can find out more about these regulations and others in the fifth edition of the A-Team Group Regulatory Data Handbook, or by registering for some of our forthcoming webinars.
Go live of MiFID II and MiFIR marks the biggest market reform in over a decade and the start of an EU regime driving financial markets transparency and investor protection. Despite today’s compliance deadline, for most firms within the scope of MiFID II, this is only the beginning of fixing things that don’t quite work, dealing with information that is due to be published by the European Securities and Markets Authority (ESMA), such as a list of firms holding Organised Trading Facility (OTF) licences, and preparing to work with unfinished elements of the regulation such as the Financial Instruments Reference Data System (FIRDS). The success of trading OTC derivatives on regulated markets using ISINs distributed by the Derivatives Service Bureau operated by the Association of National Numbering Agencies (ANNA) also hangs in the balance.
On the regulatory front, while the European Commission took a hard line on compliance last year, cracks are already beginning to show. Perhaps the biggest, and most disappointing, pull back is on the No LEI, No Trade rule, with ESMA handing out a six-month period of grace on the mandate for Legal Entity Identifier (LEIs) to be included in MiFID II reporting less than two weeks before the compliance deadline.
Despite the No LEI, No Trade mantra and programmes designed by firms to help their counterparties obtain LEIs, ESMA said that not all firms would have required LEIs by January 3, 2018 and suggested the last-minute reprieve would ensure a smoother introduction of the rules. Another blow for the LEI, but hopefully one it will recover from within the next six months.
More locally, the UK Financial Conduct Authority (FCA) today granted ICE Futures Europe and the London Metal Exchange an additional 30 months to comply with MiFID II’s clearing regulations. In a statement, the FCA said it had granted the extension after taking account of the risks and to ensure the ‘orderly functioning’ of the clearing market is maintained. The FCA’s decision follows yesterday’s move by the German regulator, BaFin, to grant the Deutsche Börse owned futures exchange Eurex a MiFID II extension.
These early regulatory amendments to MiFID II are not ideal, but perhaps not exceptional in the circumstances of regulatory implementation with a cost pitched at about $2.5 billion and ongoing compliance costs of $750 million.
The rest of the regulations
If MiFID II is top of the agenda today, don’t lose focus on the rest of this year’s regulations. Benchmarks Regulation came into force this week, affecting all firm using benchmark data, as well as PRIIPs, a huge undertaking in data management and product information distribution that has led some firms to review their product ranges.
GDPR is also a giant, replacing and extending previous privacy rules to cover the processing of personal data of all EU residents. Data management challenges include huge volumes of data, record keeping, security, avoiding breaches, and problems of data proliferation. Fines for non-compliance run up to a whopping 4% of group annual turnover, begging the question of whether financial services firms will meet the May 28, 2018 compliance deadline.
Hot on the heels of these regulations come EU SFTR requirements designed to increase the transparency of shadow banking; ongoing SEC regulatory modernisation and the implementation of the US Consolidated Audit Trail; and the next ‘big thing’, FRTB.
So, there it is, 2018 – The Year of Regulation. We hope it is a good one for you.