With Brexit just a day away and the EU regulatory agenda for 2020 beginning to unfold, we talk to EU Policy Adviser for Financial Services Regulation, Dr David Doyle, about his expectations for the year ahead, the impact of Brexit on the UK trading industry, and potential amendments to MiFID II.
To find out more about other EU regulatory initiatives expected in 2020, register for A-Team Group’s TradingTech Summit in London next month. The Summit will open with a keynote by David detailing EU regulatory impact on the UK trading industry in 2020.
Q: What can attendees expect to learn from your keynote?
A: As we enter 2020, industry faces multiple developments emerging on the EU regulatory agenda and affecting the trading and clearing space. I will touch on the most prominent of these regulatory issues, not least revisions to MiFID II, Brexit negotiations on continuing access to trading and clearing platforms, strengthened ESMA supervisory powers over non-EU clearing houses, and the imminent uncleared derivatives margin rules.
An important area of focus will be the likely evolution of the regulatory and supervisory landscape that will emerge from negotiations between the EU and the UK, with big stakes this year in managing the EU equivalence determination. Continuing access on a reciprocal basis for trading houses will depend on the outcome of the regulatory dialogue involving the European Commission, EU parliament and ESMA.
I will also glance into the future to identify other EU regulatory initiatives impacting the financial services sector, especially the integration at both institutional and product level of the ESG and climate change risk parameters.
Q: Considering post-Brexit regulation of the UK trading industry in a broad sense, what extent of change should trading firms expect?
A: Continuing access to the EU Single Market for UK-based financial institutions, despite the loss of the EU Passporting mechanism, will be critical after the UK leaves the EU. Much will depend on the outcome of the EU equivalence determination by the EU regulatory authorities of the UK’s regulatory and supervisory regime, its enforcement mechanisms etc.
The UK becomes a third-country after a transition period from 1 January 2021, with plans to complete this equivalence exercise by the end of June this year, in conformity with the terms of the Political Declaration accompanying the Withdrawal Agreement. This will be challenging. Some 40 pieces of EU legislation, from MiFID to Solvency II, from EMIR to Market Abuse, are earmarked for equivalence review.
Already, in December 2019, the European Commission confirmed its intention to renew the temporary equivalence and recognition of UK-based central counterparties (CCPs), due to expire in March 2020. This will ensure continued access to UK clearing and settlement services for EEA firms, thus avoiding significant risk to financial stability.
In the trading space, expectations are high that MiFID II/MiFIR will be a priority among the EU legislative packages to be considered under the equivalence regime. This should avoid disruption, especially with regards to the Share Trading Obligation.
Other issues likely to be raised in a post-Brexit environment will be a review of clearing ‘Open Access’ rules, i.e., choice for clients on where they can clear ETD’s, the calibration of MiFID rules when the UK is no longer included in the calculation of EU metrics collected by ESMA and direct reporting obligations of all third-country entities and actors not subject to MiFIR.
Q: How do you expect MiFID II to be revised and applied to the UK market?
A: The European Commission is poised to issue its much-awaited consultation on the revised MiFID II regime. It is expected to be released in the coming weeks, covering, inter alia, the creation of an EU consolidated tape regime, i.e., a single EU trading tape to record information on flows, transaction sizes and prices.
The EC will be scrutinising ESMA’s final recommendations to determine the optimal approach to creating an EU consolidated tape. MiFID II rules for Consolidated Tape Providers (CTPs) have applied since 1 September 2019, with a later review procedure for a non-equity consolidated tape.
Linked to this aspect are EU regulators’ concerns about the global cost of market data, at a time when banks, asset managers and high-frequency traders remain dismayed at significant hikes in fees since MiFID II/MiFIR was introduced.
We are not envisaging a wholesale revision leading to MiFID III, but targeted revisions, which will also likely cover issues in the consumer protection space, notably surrounding the disclosure of fees, commissions and non-monetary benefits, as well as future structure of the mechanism for banning certain products, PRIIPS, etc.
Feeding into the the EC’s review of the MiFID II transparency regime will be ESMA’s final reports on related matters such as:
- the equity and non-equity transparency regime
- the double volume cap
- the derivatives trading obligation
- the systematic internaliser (SI) regime
- behaviour of systematic internalisers (SIs) in non-equity instruments.
Q: How should the UK trading industry prepare for changes coming in over the next few years?
A: The EU regulatory agenda will remain critically important to the UK trading industry, with the UK remaining a global trading centre. Keeping tabs on the evolution of EU regulatory discussions and regulatory developments is critical.