Last year may have been the year of that MiFID II arrived in the markets with a bang, albeit a slightly delayed and stuttered one, but 2019 has seen the effects of the landmark regime begin to take effect.
The year began with the industry emphatically telling the European Securities and Markets Authority (ESMA) that they were opposed to regulatory intervention in the operation of periodic auctions following a call for evidence from the watchdog. In June, ESMA concluded that the venues would not be significantly restrained or banned outright following a review into their use to circumnavigate dark trading rules. Delays were once again the order of the day in late January, when ESMA announced it would push back the systematic internaliser regime for derivatives citing “incomplete and inadequate data”.
The unbundling of research payments and execution fees was one of the cornerstones of the MiFID II regime and in February this year, Financial Conduct Authority chief executive, Andrew Bailey, said that the separation could see investors in the UK save up to £1 billion over the next five years. However, research published by the CFA Institute, published around the same time, painted a less rosy picture of the situation, finding that buy-side research budgets had decreased since the change, as had the quality of research. As a counterweight to this, the FCA then released figures in September that stated a cost saving of £70 million for investors in UK equities funds as a result of unbundling, that had resulted in “improved accountability and scrutiny over both research and execution costs.”
Trade and transaction reporting requirements have been one of the major stumbling blocks of life under MiFID II, and in September the buy-side vocalised their collective concern about this burden being added to. The buy-side’s concern may be well-founded according to a cross-industry survey published in early December, which found that European regulators are failing to provide feedback to most market participants on the quality of transaction reports submitted under MiFID II, while a separate report found made clear the scale of erroneous reporting throughout the industry.
For its part, ESMA has stated that it will continue to review the MiFID II regime going forward in a “staggered and focused” approach, and the industry can expect several key consultations and review reports down the road, specifically on the MiFID II transparency regime, including the double volume cap, derivatives trading obligation and systematic internaliser regime.
Of course, there were other regulatory concerns outside MiFID II for the industry to grapple with over the course of 2019. The decision to delay the final phase of the impending uncleared margin rules (UMR) for non-cleared derivatives until September 2021 by the Basel Committee and IOSCO will have come as a some relief to the cadre of asset managers, hedge funds and insurers that will fall under scope. Research from technology vendor SimCorp found that only a fraction of buy-side firms are ready to comply with the new collateral rules for uncleared derivatives. Meanwhile, there has been a surge in the number of suspicious transactions and orders reports under the Market Abuse Regulation (MAR), prompting Europe’s watchdog to call for greater supervision of the reporting.
ESMA has also renewed its push for a European consolidated tape for equity instruments, launching an industry consultation on the issue in July and then recommending the introduction of the tool as a remedy to the fragmented European markets and the ongoing friction around market data costs.