Dr Kay Swinburne, the Welsh Conservative MEP known for her instrumental role in the architecture of MiFID II, has issued a stark warning on the highly politicised environment to be expected over the next six months.
As Brexit negotiations take centre stage and technical considerations become subsumed by partisan agendas, Swinburne further stressed the potential impact this approach could have on MiFID market developments.
Addressing over 150 industry players in her keynote speech at our very own A-Team Group TradingTech Briefing entitled “MiFID II: Interacting with the New Market Structure” in London yesterday, she emphasized that: “Politics are being prioritised in the nitty gritty of legislation like never before. The next six months will be unprecedented disruption and it will be very, very turbulent… my advice to you is to keep your head down.”
Swinburne noted that the UK’s departure from the EU in 2019 would bring substantial changes to a system already in flux. The leaving date in March 2019 will be followed by the election of a new EU Parliament in May, along with a whole new set of EU Commissioners and a new President of the EU Commission, and the addition of extended powers for EU supervisory authorities under the next mandate. A new Chair of the European Central Bank (ECB) will succeed Mario Draghi in October, with a subsequent board level reshuffle. In short, “everything will change” and a lot of people will be coming to the table “cold” with little knowledge of MiFD II and new agendas to promote – which is why, Swinburne urged, the industry must present clear, independent and transparent data and educate the new cohort in an unbiased manner to establish trust.
But there are other challenges ahead. For example, how will thresholds be calibrated following a UK exit? Will the EU decide to include or exclude the UK’s data (and, based on the recent example of Switzerland, to which side would a data exclusion actually be detrimental?).
“It is a strange situation we are in,” mused Swinburne. “After Brexit I think the UK will stay fairly closely wedded to MiFID II and the principles within it. I am not so sure our EU colleagues will, however, so it is a question of wait and see. The UK was a great supporter of MiFID II and I think will continue that spirit going forwards. But if I had known that we would be using the Third Country Provisions in MiFID II ourselves, I might have spent a little more time and detail in writing them!”
The Third-Party Provisions present one of the key concerns in a post-Brexit MiFID landscape.
Since the UK’s EU Referendum in June 2016, the approach from EU countries towards the provisions has been varied. “In some, it has been ignored altogether,” explained Swinburne. “In others, complex tiering systems have been proposed – for example, replacing a country by country approach with a company by company system for those firms with systemic importance.”
Another worry is that with the absence of the UK, the capital markets focus in the EU may not be the same going forward. “Without the UK putting data on the table and talking in a very open and pragmatic way, MiFID II could start to look very different,” Swinburne warned her audience. “So you as an industry need to supply that data and tell them what you need. You have to set the tone for future iterations of MiFID and direct where it goes to. It is really important that the UK remains involved, and really important that as we start to exit, we find ways of re-engaging and keeping that information and data flowing.”
Before we look at future iterations, we must evaluate current performance – and according to Swinburne, it is too soon to tell how MiFID II has impacted the market. “MiFID II was not a post-crisis piece of work, and it predated even the financial crisis. It was always supposed to be part of a much broader package of reforms, and part of a bigger look at the trading environment in Europe. It was always envisaged as a never-ending project, and we knew that it was a massive piece of work from the outset – it was never going to be easy, straightforward or definitive,” she explained. “We spent nine years working on MiFID II and now we are being asked to play judge and jury as to its effects, just nine months after implementation? Yes, there are teething problems, and we all have questions, but it is too early to say whether it has been successful yet.”
All the same, some adjustments are already in motion – in particular the SI tick size regime, which is due to be addressed in an amendment to the EU Investment Firm Review (IFR) proposed by German MEP Marcus Furber. “The reality is that even before MiFID II was implemented in January, we knew there was a tick size issue,” admitted Swinburne. “We needed to find a legislative vehicle to implement the change, which is why we are using the IFR. We do believe that Systematic Internalisation (SI) activity goes against the spirit of MiFID II legislation – nobody in Parliament believes that marginal incremental improvements in price justify giving SIs special status. Parliament has decided it is not going to turn a blind eye to this. We will have that change coming very shortly.”
Looking ahead however, Swinburne played down the impact of a new iteration; stressing that “MiFID III” was unlikely to bring the same level of regulatory revolution as its predecessor.
“MiFID III inspires a lot of fear in absolutely everybody,” she noted. “When it comes into effect, it will be about politics as well as about the impact on the market – the timeframe will coincide with Brexit and the changes will be about Brexit and how the market must adapt…
“But it will also be about expansion and finessing – it won’t be a major piece of work. MiFID II broke all the rules for a follow-on piece of legislation – reviews are built into every piece of EU legislation and usually each review makes very small, technical changes that build on each other.
“MiFID III next time round will be no exception.”