MiFID 2 revises the current EU trading rules across all asset classes and products, and introduces an additional regulation to cover market structure. Banks, investment managers, insurers, energy firms and some corporates will eventually be covered. The enormous breadth and technical depth of proposals has tested the rule-making process of the EU to its limits, as differing interests compete to secure relative advantages in the emerging new market landscape.
At the heart of reforms are measures that will increase levels of transparency on all trading activities and further the move from Over the Counter (OTC) to standardised and centrally cleared derivatives. Much of the broad direction here is in line with internationally agreed measures being implemented in the US and Asia. However, important differences have emerged, which the internationally active banks, investment managers and energy firms are seeking to minimise. Their experience from implementing Dodd-Frank and the European Market Infrastructure Regulation (EMIR) is that differences in the scope and specific requirements have significant implications on current business and operating models. Many firms are yet to even fully scope how MiFID 2 will affect them, despite the almost agreed final rules.
Areas for negotiation
Many of the areas of remaining disagreement between negotiators relate to non-technical issues. Both the European Commission and Parliament are pushing for strict third country equivalence arrangements to protect European investors from non-EU firms, but many claim that this would shut Europe out of global trading opportunities and restrict activities like analysis and research from non-EU firms. The intended upside of tough equivalence would be a single EU passport for those firms, rather than individual arrangements with each country. Member states have failed to really tackle the issue and currently propose a watering down and long phasing-in period for requirements. One current compromise would see equivalence transitioned in over seven years from the rules being in force. Other outstanding issues include restrictions on High Frequency Trading, open access to trading venues and the scope of the new Organised Trading Facility (OTF) trading venue.
Negotiators aim to conclude discussions by the end of December 2013 – any running over into 2014 risks hitting the European elections in April. Failure to agree under this European Parliament would mean the entire proposal being parked until later in 2014. If agreement is reached this year, what follows will be up to two years of detailed technical standards and full implementation by 2016. But if Dodd-Frank and EMIR are anything to go by, even these technical standards could be subject to delays, meaning uncertainty over critical details for possibly some time to come.
For further information, please contact Jon Hogan, Paula Smith or Marius Floca.