The European Securities and Markets Authority’s (ESMA) discussion paper on MiFID II, published last week, gives some initial insights into the practical implications of the upcoming regime, though there remains much uncertainty.
ESMA has published two papers on MiFID II. The first is a consultation the regulator will use to provide the European Commission with additional advice about the implementation process, outlining the potential impact of some measures and performing a cost-benefit analysis of the process.
The second and larger document poses a number of questions to the industry and stakeholders on how high-level political agreements reached in January on issues such as dark pool caps and open access to derivatives clearing services can be turned into workable regulatory technical standards (RTS).
The industry has until 1 August of to respond to the papers, and the relatively short timeframe has raised some concerns.
Anne Plested, head of trading technology provider Fidessa’s regulatory change group in Europe, said: “There is a lot of detail for the industry to consider and significant effort involved in responding in that relatively short timeframe.”
Plested, appointed to ESMA’s Consultative Working Group as an external stakeholder representative this month, said the industry has its work cut out to both digest and respond to the 500-plus pages that make up the discussion paper is a little over two months.
ESMA is under pressure to progress with the consultation process quickly, in part because it must advise the European Commission on the implementation of MiFID II before the end of 2014. It also plans to launch a full consultation containing its draft RTS by the same deadline in order to be able to both develop final rules and allow the industry time to prepare before the end of 2016 target set out by the Commission.
Nonetheless, Plested believes ESMA’s consultation has been well-thought through and should provide useful material to develop workable RTS.
“ESMA is asking the right questions to the industry to help develop the consultation paper that will form the next stage of implementation,” she said.
More clarity needed
However, UK buy-side trade body the Investment Management Association (IMA) said the industry was in need of more clarity, particularly around how controversial caps on dark pool trading will work.
Arjun Singh-Muchelle, senior adviser on regulatory affairs at the IMA, explained: “On the volume caps, there are a number of questions where we need clarification: Who will provide the data? Will a legal requirement exist to provide the data? Who will be responsible for cleaning the raw market data? And how will it then be interpreted and published by ESMA?”
He called for the European Commission to give ESMA the authority to be able to monitor the volume caps and take action if needed.
Other issues tackled in the paper include a potential recalibration of the large-in-scale waiver for block trades. The waiver, which is not included in the caps on dark pool trading, has been criticised for being too high, which had led to it seeing limited use. Previous industry discussions on the issue had concluded a recalibration unlikely but ESMA’s discussion paper asks whether the threshold for large-in-scale trades should be revised alongside the ‘size specific’ waiver exclusively used in voice and request for quote trading.
Correct calibration of waivers is vital to preserving the ability of asset managers to execute block trades, according to Singh-Muchelle, who added: “The need for asset managers to trade in large size must be respected. The large-in-scale waiver is as important as the volume caps and must be calibrated sensitively.”
The paper also asks the industry for proposals on how to implement a consolidated tape, which many believe is vital to being able to adequately calculate when dark pool caps have been reached.
Additionally, it has called on trading venues to do more to standardise their data to enable it to be more easily aggregated and compared, as well as seeking full clock synchronisation to ensure all reported data is properly time stamped.