By Tomas Kindler, Strategic Services, SIX Securities Services
The decision in mid-December by the US Federal Reserve to begin the process of raising interest rates has been hailed in the press as the start of a change of mindset, situating the 2008 financial crisis and the reaction to it as a past event.
However, both market infrastructures and participants are still in the midst of grappling with the regulatory aftermath of the crisis. In this context, the recent delay to the implementation of MiFID II is not really a game changer. It does, however, have a number of short- to medium-term implications for the securities services industry.
While pre-crisis MiFID mainly targeted the trading layer, the aftermath of the financial crisis saw regulators taking a more direct approach to encouraging the use of central clearing in a broader range of asset classes and in financial market risk mitigation in particular.
Once in effect, MiFID II will have a material impact on where and how securities and derivatives are traded and cleared, as well as on levels of volatility and liquidity. Some of the mechanisms of MiFID II that will affect the markets are relatively straightforward, others less so. Given the process surrounding its implementation, however, the announcement of a year’s delay has not really come as a shock.
The final version of the Directive itself was the result of two years of negotiation. It was approved by national governments and the EU parliament in early 2014, with a start date of January 2017. The key enabler, as with many other EU directives, is the release of technical implementation standards that set out the practical details of what the various stakeholders actually need to do.
The end of September 2015, for example, saw the release by the European Securities and Markets Authority (ESMA) of its Technical Standards (TS) relating to the implementation of both the CSD Regulation (CSDR) and MiFID II. However, these standards subject to another round of approvals and it is here that the delay has been brought about while certain differences between the EU Parliament and ESMA are ironed out. The Parliament is likely to seek certain changes to the standards proposed. At the same time, participants will need sufficient lead-in time to make the necessary systems changes to comply with the implementation requirements.
What could this latest delay mean for the market as a whole? As far as the post-trade landscape is concerned, MiFID II provides the main regulatory pressure for vertically integrated markets to open up to competitive clearing, and for asset classes other than equities and derivatives to move towards electronic trading, and in due course, to centralised clearing. This pressure will possibly be eased, though not removed, by a later start date.
More concretely, there will be a delay in providing central counterparties (CCPs) with a tool to request access to the data feed of currently closed exchanges. There will be less urgency for vertically integrated groups to open up to other non-group CCPs and to allow international banks to further consolidate their clearing business. Some delay in this process was already anticipated, even if the implementation date had not been postponed.
Vertical models allow participants to trade, clear and settle in a single infrastructure, and are operated by some of Europe’s major derivatives players. SIX operates a horizontal clearing house in Europe and has long been an advocate of open access. However, a political agreement at the start of 2015 meant that open access to CCPs that are part of a vertically integrated model would be phased in.
It is also possible that there will be a further delay in the shift to electronic trading in bond markets, with bilateral structures still dominating. A multitude of ventures to foster electronic trading of bonds have been launched, but as a regulatory imperative, they have so far been slow to displace traditional market practices.
As far as the business models of CCPs, are concerned, we do not expect the delay to have any major additional impact. CCPs depending on and fighting for further access to European equities markets, as well as those aiming to diversify into other asset classes, mainly bonds, will regard the delay as a setback from a timing perspective, but are unlikely to rewrite their business strategies.
While the long-term impact of MiFID II on the market landscape might indeed be transformative, we at SIX Securities Services do not expect the latest delay to have any dramatic impact on the ultimate shape of that landscape. It will simply restrain the pace of change. Given the multiple regulatory challenges facing participants along the value chain, no one will yet be taking their eye off the ball.