A crucial meeting of European legislators next week could see MiFID II finalised, but industry practitioners are concerned the legislation may be rushed due to electoral pressures.
MiFID II was originally due to be agreed in principle by the end of 2013 but a series of disagreements have seen that deadline slip. The legislation is currently in the trialogue stage, which brings together the European Parliament, European Commission and Council of the European Union to settle on a final text.
Areas of MiFID II that have already been agreed during the four-month trialogue process include supervision of algorithms and curbs on high-frequency trading, a cap on dark pool trading and limits to the use of reference price waivers.
While the trialogue stage can continue indefinitely, both the European Parliament and European Commission are set to see their membership change this year, which would pose a significant setback to negotiations.
Members of the European Parliament are facing elections in May but are expected to leave Brussels as soon as February to begin campaigning. Christian Krohn, managing director at the Association for Financial Markets in Europe, said: “Gaining political agreement on the primary texts is clearly easier said than done and there is a risk that failure to reach agreement in the next month or so could delay this part of the process until after the European Parliament elections in May.”
The European Commission is also scheduled to be replaced in October and rumours suggest current European Commissioner responsible for MiFID, Michel Barnier, could be nominated by France as a candidate for European President, meaning further delays to agreeing MiFID II could result in the legislation being put on the back burner until next year.
Among the outstanding issues to be resolved are perimeter guidance, which concerns the final scope of the firms affected by MiFID II, and some provisions on commodity markets. Open access to central counterparties is also likely to prove a major sticking point in the coming weeks.
Alex McDonald, CEO of the Wholesale Markets and Brokers Association (WMBA), believes that time pressures will force trialogue participants to make concessions to ensure MiFID is pushed through.
“Although the debate around perimeter guidance still seems stuck, a recourse to the Regulation for the wholesale Energy Markets Integrity and Transparency (REMIT) leaves me confident that the outstanding commodity-related MiFID provisions will be resolved in next week’s trialogue session,” he said.
“With the European Parliament and the Commission both under time pressure and, in order to ensure the legislation is completed, it’s more likely that the Council will continue to gain sway on the outstanding issues.”
REMIT puts greater reporting obligations on firms trading in the wholesale energy market to prevent abuses and is due to be implemented this year and market participants in the commodity space will be affected by both MiFID and REMIT.
However, Andrew Bowley, head of business operations and risk at agency broker Instinet Europe, warned that rushing the trialogue process could result in damaging regulation.
“It is disappointing that uncertainty about the future market structure continues, and it should also be concerning that there has been such a long cycle between MiFID I and MiFID II; this suggests that future changes to the structure could be a long time in gestation. On the flip side though it is not helpful to the market to have changes that are not thoroughly considered,” he explained.
While some provisions might be rushed, McDonald suggested that national regulators would take responsibility for issues that cannot be finalised at the European level.
“A lot of unresolved provisions, such as those around the setting and monitoring of position management in commodity derivatives for example, may only be agreed in MiFID by derogation to national competent authorities, with the European Securities and Market Authority holding a coordination role,” he added.
While agreement on the final text of MiFID may be close, Krohn said that the lengthy implementation process means market participants are unlikely to have a full view of how market structure will change in the near term.
He said: “Even when the primary texts are agreed, a great deal of work will need to be done to develop the implementing measures necessary to give them effect, so regulatory uncertainty will remain a key feature of 2014 and beyond.”