A joint industry initiative to respond to MiFID II should draw lessons from the US to ensure technical rules are drafted and implemented effectively.
The Joint Trade Association Group (JTAG) has been put together by European sell-side bodies to provide a coherent response to the European Securities and Markets Authority’s (ESMA) recent consultation and discussion papers.
The Wholesale Markets Brokers Association (WMBA) is part of the JTAG initiative and will coordinate its feedback on open access provisions for central counterparties (CCPs) in MiFID II.
David Clark, chairman of the WMBA, said: “The goal of the JTAG is to bring the industry together and answer the questions posed in the MiFID II papers in a coordinated and rational way.”
With more than 600 pages of text to be digested and hundreds of questions posed, requiring a response in a relatively short timescale (the first round of consultation ends on 1 August), JTAG is hoping that it can help to provide robust feedback to regulators.
Clark said both regulators and practitioners were keen to learn from the process of turning the US Dodd-Frank Act into workable technical rules.
“We’re working to a tight timescale, but I think European regulators have drawn lessons from the US experience, where perhaps too much time was spent legislating leaving less for actual implementation. We want to make sure we can provide input to ESMA in digestible chunks that they can use to formulate effective rules.”
After ESMA has received consultation responses on 1 August, it will have to draft a full consultation paper on regulatory technical standards and provide implementation advice to the European Commission by the end of 2014. Clark said the JTAG initiative has been welcomed by ESMA and will aim to ensure the regulator is able to access the expertise it needs to draft the regulatory technical standards due by the end of the year.
For the WMBA, MiFID II’s open access provisions, which are intended to end vertical silos in the clearing of derivatives products and provide market participants with choice of clearing venue, are among the most difficult issues raised by the consultation, according to Clark.
“Resolution and recovery planning is the biggest issue we need to tackle with CCPs, and is likely to be one of the toughest areas to find solutions for,” he said.
“There are a number of outstanding questions to be answered, such as: are CCPs utilities? What will their commercial imperatives be? How will open access work with products that are mandated into clearing? And lastly, are all of the users, financial and non-financial, satisfied with this?”
A number of exchange groups currently operate a vertical siloed model of derivatives trading and clearing, such as IntercontinentalExchange and Eurex, which will be lobbying to limit the extent of open access and interoperability achieved in Europe.
Clark added that ongoing uncertainty around how CCP rules will be applied to third countries via substituted compliance was an ongoing concern, particularly as it is unlikely consensus between Europe and the US will have been achieved by 1 August.
Another JTAG member, the Futures Industry Association Europe, recently highlighted concerns with the way MiFID II will seek to determine whether some instruments are liquid enough to be traded on a new category of venue, the organised trading facility (OTF). It said that, while criteria to measure liquidity have been set out, ESMA has yet to provide guidance on how those criteria can be used to assess the liquidity position of a given instrument. It also criticised a lack of clarity on how OTFs will actually be implemented, making it difficult for market participants to understand how they will affect trading.