The revised Markets in Financial Instruments Directive, dubbed Mifid II, is a package of wide-ranging trading reforms taking effect in 2018 designed to address some of the unintended consequences caused by the original 2007 directive. Along with the European Market Infrastructure Regulation, it also makes good on parts of the post-crisis reforms agreed to by G20 leaders in 2009 to shore up swaps markets, including a trading obligation for standardised derivatives.
However, Mifid II goes further than the G20 agreements, including controls on market data pricing, position limits for commodity derivatives, open access rules requiring clearing houses to process any product on a non-discriminatory basis and new transparency requirements for a range of asset classes.
Scott Hill, ICE‘s chief financial officer, told a Barclays conference on September 13 that “time will tell what the impact of Mifid II will be and how Brexit impacts the timing of it and the nature of it”.
Hill said Brexit “certainly runs the risk” of delaying some of the Mifid II reforms.
But he added: “We’re certainly hoping that the UK will take a step back and look at Mifid II and some of the requirements that went well beyond the G20 agreements and frankly, looked at regulation for markets, the futures markets, which have not historically had any issues at all.”
Any backdown from the UK’s Financial Conduct Authority seems unlikely because it helped drive many elements of Mifid II and it has already made clear that the rulebook will have to be implemented in the UK regardless of Brexit, as its timetabled entry into force in January 2018 will be before the UK has formally withdrawn from the EU.
Andrew Bailey, the FCA’s chief executive, said in July that “firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect”.
The FCA does have some leeway as to how it implements EU rules when they are taking force under a directive, rather than a regulation – parts of Mifid II are being introduced via a regulation, but some elements are through a directive. The UK regulator has already published two consultations on how it intends to adopt Mifid II, and a third one, running to over 200 pages, is expected at the end of September covering topics including inducements, research payments and conduct of business issues.
Since the Brexit vote, some UK firms have been of the view that Mifid II implementation should be pared back to prevent the UK being locked into the rules once it has left the EU.
Alexander McDonald, chief executive of the Wholesale Market Brokers’ Association, the trade body for interdealer brokers, said: “There is a view among some firms that the impact and level of implementation of Mifid II in the UK should be minimised until we know something more concrete on Brexit”.
However, he added he “does not see any practical alternative, nor intention from the authorities, away from the current process of full adherence and transposition for January 2018”.
Whether the UK will stick to the Mifid II regime after it has left the EU is unclear, but doing so would likely make it easier for UK firms to retain access to the single market. If the UK decides not remain part of the European Economic Area, then it will need to ensure its trading rules are deemed ‘equivalent’ to Mifid II to give UK firms continued EU passporting rights, but only for wholesale trading activity. However, equivalency decisions lie entirely with the European Commission and critics say a positive determination could be reversed at any time, making it an unsuitable arrangement for the financial services sector to rely on.
ICE, which operates a large futures exchange and clearing house in London, covering commodities, energy and financial futures, will be hugely impacted by the Mifid II rules, particularly those on open access, because it operates a vertical model whereby its clearing houses operate exclusively for its own markets. However, Hill said at the Barclays conference that the “reality is the net of regulatory change over time for our business has been an opportunity”.
He added: “Even to the extent that open access puts downward pressure on the trading value, its going to put upward pressure on the clearing value that we’re able to capture. Whether its skin in the game requirements, recovery and resolution and increasing regulatory capital requirements it’s going to be really hard to launch a new clearing house in the future. We think that ultimately however it plays out, it’ll be a net benefit to us and our shareholders.”
An ICE spokeswoman declined to comment beyond Hill’s transcripted conference remarks.