While 2014 is set to be a particularly busy year for European market participants on the regulatory front, with many new regulations to be implemented or moved to level two discussions this year, spare a thought for the mammoth workload currently facing the European Securities and Markets Authority (ESMA).
In a meeting with Tomas Kindler, head of clearing relations, SIX Securities Services, last week it was outlined to me the huge task ahead of ESMA when it comes to re-authorising third-country central counterparties (CCPs), and this is just one of the many jobs the supra-national regulator needs to deal with this year.
When the European Commission first set ESMA the task of assessing non-EU CCPs as part of EMIR, it expected only around a dozen would apply. As of now, a whopping 34 have submitted applications to be authorised to provide derivatives clearing services for European firms operating outside the EU.
On top of authorising clearing houses, ESMA also needs to assess the derivatives trading regulations of whole countries.
Thus far, ESMA has completed only a handful of equivalency assessments, (where it assesses a particular third-country regulatory regime to establish whether its rules are sufficient enough to be considered equivalent to European regulation) each of which has multiple criteria on which they will be judged and the European Commission has yet to formally approve any. Third-country assessments will be vital to speeding up the CCP authorisation process, as once a country’s regime has been approved, the CCPs operating under it can be considered compliant with equivalent standards to EMIR.
With so many CCPs to be authorised, and ESMA expecting further mandates from the Commission to assess third countries, it seems unlikely everything will be in order given it has a nine-month deadline to authorise a non-EU CCP after it has applied.
While the European market infrastructure regulation poses a major burden for ESMA as it begins to be implemented this year, other regulations are now moving to their ‘level two’ phase of development, including the formidable MiFID II.
In the coming weeks, ESMA will publish technical documents which will detail the many different aspects of MiFID II that the regulator needs to implement (the high-level political discussions in the trialogue process represent only about 1% of everything that will be the legislation according to some estimates). Once these documents are finalised and approved by politicians, then ESMA faces the unenviable task of creating rules that the industry can work with.
However, a number of areas are likely to prove particularly tough to develop rules around, not least of which is the proposed 4% and 8% caps on dark pool trading.
To even begin to implement the cap, a consolidated feed of European equity trades would be needed, something the industry has grappled with for years and failed to achieve. ESMA also needs to decide the period over which activity is measured, how the market would be notified that the cap has been reached and consider how to tackle gaming of the caps, none of which are easy issues.
MiFID II is one of the large projects for the regulator this year, but ESMA is currently dealing with more than 70 directives in their level two stage.
ESMA’s plight us not helped by the way European regulation is created. Implementation deadlines tend to be set by politicians in the early stages of developing legislation in the level one phase. However, the process of agreeing regulation often tends to drag on for months or years.
Unfortunately, this doesn’t always result in rule-making or implementation deadlines being shifted into the future, meaning the level two stage is compressed. Given the complexity of financial regulation that ESMA needs to implement, this compression of its timetables isn’t helpful for either the regulator or the industry.