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JWG regulatory trading digest - The end of the beginning: conclusions from Paris

Published in Automated Trader Magazine Issue 36 Spring 2015

This month, ESMA hosted a broad cross-section of market participants for a final 'hearing' on the MiFID II technical standards they will send to Brussels for approval this summer. Of course, many attendees were surprised to find that, while they were en route to Paris, another 355 pages of MiFID II technical standards consultation were issued for comment by 20 March.

As we have known for a while, if all goes according to plan, the 2500+ pages of consultation will redefine the trading landscape in the European Union in 2017. What was apparent from this hearing is that, despite the rush to Paris, we are nearing the end of the initial discussion phase and the implementation phase is nearly ready to launch.

For all of ESMA's rhetoric about openness to new ideas, the fact is that there was a large number of suggestions that were either dismissed out of hand or ignored. In fairness to a panel that often spoke with admirable clarity, there may have been little more that they could do in front of such a disparate array of people with different business interests, all desperately trying to protect their own profit margins.

Perhaps the most repeated line heard from the stage was some variation of "we don't disagree, but …". ESMA put their inability to act down to either a lack of time and resource, as in responding to the criticism of the COFIA (classes of financial instruments) approach to defining liquidity, or the limitations of the mandate handed to them by politicians, as in only being able to define the format of position reports and nothing more. It is worthy of note, however, that some topics generating a lot of heat (e.g., transaction reporting), were not brought to the floor.

A real indication of how hamstrung ESMA feel by the level one text of MiFID II was a stark admission that, rather than their liquidity standards being about actually defining liquidity, it was more about writing them in such a way that will allow the transparency rules under MiFID II to be workable.

The sense that we took away was that the final rules are imminent and only in a handful of areas will fine tuning occur. Of course, this does not mean that all the rules will be written in a way that makes them clear and that offers a glimpse of the of implementers' future reality.

From July, the only mechanism that the regulator will have to clear up any of these issues will be the dreaded Q&A documents. For those of you lucky to have experience of EMIR implementation, you will remember the important issues of scope and detail were not always as fixed as we had presumed. At the 11th, 12th or even 13th hour, important requirements were clarified in detailed, but at times vague, new standards which were to be immediately applied.

Overall, we were heartened by this progression into a new phase of the MiFID II programme. The time for speculation is running out and the real implementation work is due to begin.

Regulation Roundup

While MiFID II may well be taking all of the headlines, it is far from the only thing that has been going on in the world of regulation in this first quarter of 2015. From a battle over the future of the Dodd-Frank Act in the US, to emphasis on moving the LEI (Legal Entity Identifier) project forward at an international level and continued focus on data quality in the EU and elsewhere, regulators across the globe are pushing forwards with far reaching agendas for change.


The new Republican-dominated Congress in the US has opened a political battle over the future of Dodd-Frank. This has already resulted in delays to the implementation of the Volcker Rule and the retraction of rules restricting derivatives traders' eligibility for public bailouts. It seems certain that this will be a long battle that will dominate US financial news throughout 2015.

Meanwhile, the SEC are pushing hard for greater transparency in OTC markets with new rules for swap data repositories , which will necessitate registration, governance standards and a chief compliance officer for data warehouses. In the same space, CFTC Commissioner Giancarlo has been publically deriding the commissions own swaps trading rules, saying that "they increase market fragility and systemic risk".


Across the border in Canada, the Canadian Securities Administrators are seeking public comment on new rules regarding mandatory central counterparty clearing of derivatives as they continue to lag behind the EU in this area. These new rules are essentially the Canadian EMIR which were initially proposed in 2013 but have been held up continually in the legislative process. Here's hoping the time spent writing the rules will lead to a smoother implementation process than the one still causing aftershocks in Europe.

The Investment Industry Regulatory Organisation of Canada last month unveiled a new FAQ for their Client Relationship Model regime. The regime centres around pre-trade disclosure of charges and this new document addresses perceived shortcomings in the application of the rules to investment products other than securities, futures contract options and futures contracts.


France's primary market regulator, the AMF, has been working hard laying the early groundwork for MiFID II, and moving earlier than many of their fellow national competent authorities on position limits by publishing new guidance that is broadly in line with the EU level MiFID II proposals. The other area of activity was on best execution - just like the FCA in the UK in November, the AMF has published new guidance in line with the tougher incoming MiFID II regime.


At the European level, ESMA have published their annual report and work plan for credit rating agencies and trade repositories. Their comments on TRs are particularly relevant in light of the huge data quality problems that dogged EMIR trade reporting throughout 2014. In ESMA's view, it is not unlikely that some reporting service providers will also decide to launch a TR, but no third country recognition of TRs is expected to take place in the near future. ESMA also noted that they have developed a data validation tool which is used to analyse data files downloaded from TRs, and that there will be onsite inspections and individual reviews of TRs in a drive to push up data standards.

ESMA has released an updated Q&A on AIFMD (Alternative Investment Fund Managers Directive). The new guidance says that short positions should be included in assets under management.


New standards have been published from IOSCO (International Organisation of Securities Commissions) on risk mitigation techniques for OTC derivatives that are not centrally cleared. These are broadly in line with what is already happening in the EU under EMIR, regarding trade confirmations and reconciliation, and with what is planned for the EU under MiFID II, regarding portfolio compression and cross-border transactions.

2015 looks set to be another busy year for the Financial Stability Board. Their newly published annual report states that a series of seven peer reviews on OTC reform is due to be completed in 2015. The report also includes detailed plans for financial benchmarks and advancing transparency through the LEI.


Looking towards Australia, FX benchmarks were at the top of the regulatory agenda at the turn of the year. Guy Debelle, the Assistant Governor of the Reserve Bank of Australia, has been commenting on the behaviour of market participants on all sides of the market, calling on dealers, asset managers and index providers to address the possible incentives for market manipulation, stating that this will be crucial to progress in this space.


In Singapore, Ravi Menon, Managing Director of the Monetary Authority of Singapore (MAS), has been following a similar theme to many of his regulatory colleagues by focusing his attention on "building a culture of trust in the financial industry". Menon told the Singapore Academy of Law Conference that "reform of the financial industry will not be complete until this issue of trust and ethics is addressed. This requires getting the culture right. And by culture, I mean the shared values, attitudes and norms that guide actions".


The attention of the Securities and Exchange Board of India has been on insider trading regulation which looks set to bring India onto a level playing field with most of the rest of the G20 in the financial crime space. The regulation, which will not come into effect until at least June of this year, sets out restrictions on communication and trading by insiders, in a move that will not surprise those who have been watching the headlines in recent months.

That's the end of our world tour for now, but stay tuned for our next update as we wait for final rules on MiFID II and updated EMIR trade reporting requirements whilst the intense political debate in the US continues.