The European Commission is planning to review newly-agreed derivatives rules within MiFID in the near future – a move Newedge’s global head of new regulation monitoring and implementation, John Nicholas, says signals its appetite to have more robust, comparable regulation.
European politicians reached an agreement on core MiFID II rules in January, but according to the European Commission, its ambitious proposals to achieve fully transparent non-equity markets, in particular for derivatives, was not endorsed in the final agreement.
The Commission’s disappointment was first mentioned by Commissioner Michel Barnier in a speech following the trilogue agreement, and has since been echoed in an 18 February statement.
“[The Commission] will review this matter again in the near future against the objective of achieving effective and fair price formation on financial markets and make legislative proposals if appropriate,” it said.
The full MiFID II document has yet to be released, but a Commission spokeswoman said co-legislators have introduced several amendments to lower the level of proposed transparency. Therefore, the Commission is planning a review in two years after the entry into application.
Industry experts have expressed concerns about too much transparency in MiFID, saying that it could damage the provision of liquidity, particularly around dark pools.
Nicholas said he supported price formation transparency, both pre- and post-trade, as seen in the US in both the bond and derivatives markets. For Europe to be granted mutual recognition by non-EU jurisdictions, it needs to keep up.
“It’s going to have to measure its regulation versus those being issued in the Americas and Asia Pacific. If they lag behind that could be problematic for European market participants,” he said.
“It’s a global market, particularly in the OTC derivatives world, and I think it’s incumbent on the European Commission to issue rules that are sufficiently robust.”
Nicholas said he was sympathetic the Commission’s concerns, and would support further rules as long as the cost of implementation and lead time was taken into account.
He said Europe’s decision to split derivatives rules into two major pieces of legislation – the European market infrastructure regulation and MiFID – was a problem.
In the US all of the derivatives rules were packaged into the Dodd-Frank Act. “I think it helped the industry in terms of timing, in terms of looking at the big picture and going forward, which bifurcating European derivatives legislation may not necessarily do,” Nicholas said.
In its statement, the Commission was also critical of the 30-month open access transitional period for trading venues and central counterparties (CCPs).
“While agreeing that a gradual transition towards a complete opening may be useful, the agreement reached by the co-legislators will not reach the purpose intended by the Commission proposal.
“Transitional periods of more than two years after the entry into application … would further consolidate vested market positions,” it said.
MiFID II includes requirements for CCPs to be interoperable, enabling listed derivatives market participants to freely choose which CCP they want to use regardless of the venue they traded on. However, the final agreement enables firms operating vertical silos to delay open access to their venues and clearing houses.
European politicians were under pressure to reach an agreement on MiFID early this year, as European Parliament elections due in May means few MEPs will be in Brussels from mid-February. A new European Commission is also due to be appointed in October.
While the industry welcomed the MiFID agreement, which it is hoped will bring increased certainty to the regulatory landscape for Europe’s financial markets, there were concerns over a need for clarification about both the agreed rules and how they will be implemented.
The regulation and the directive will still have to be approved by the parliament.