Regime change and the regulatory fallout

Following a lengthy consultation and drafting period (ongoing since 2011/12), the final Level 1 texts for MiFID II and MiFIR were approved by the European Parliament (EP)’s Economic and Monetary (ECON) Committee on 3rd March. Last night, the European Parliament approved these texts at the final plenary session ahead of the European Parliament elections in May 2014. This is a key milestone as, had the proposals not been approved, then negotiations would have needed to continue under a new Parliament following the May elections. Normally this would not be regarded as a major obstacle, but the upcoming elections may well throw up some unusual results. Anti-Euro Sentiment is running high in many of the member countries and many observers are expecting an anti-Euro (and Brussels) backlash from the voting population. 

In the UK, the United Kingdom Independence Party (UKIP), under Nigel Farage, has made no secret of the fact that they are hoping to come out of the elections with the largest number of European Parliament Members (MEPs) of all UK parties. Whilst this may be somewhat aspirational, a swing to the Euro-sceptic parties is expected across Europe, and research shows that the outlying blocks of MEPs can have quite a marked effect on voting patterns, when forming coalitions with either the right or left, and this will only increase if the far-right or far-left gain votes as expected. Additionally, many of the anti-euro candidates are running on an anti-banking agenda as they see the current malaise as caused by greedy European banks and compliant and sleepy European regulators. It is unclear how they would view the proposed changes to MiFID, although the assumption is that they would make the measures even more draconian and stifling for the banking industry. Therefore, the current MEPs have been concerned that the proposals that have been drafted during the last two years could have been blocked by the new parliament, causing delays, re-writes and unforeseen changes to the tone and measures contained in the Directive and Regulation.

It is important to note that MiFIR will become European Regulation as soon as final agreement is reached, but that MiFID II, as a directive, must be transposed into each Member State’s Laws at a national level. The Level 1 text is due to be published in the EU’s Official Journal in Q2 2014, after which the member states have 24 months to transpose the directive. The European Securities and Markets Agency (ESMA) will start the consultation on and drafting of the technical standards in Q2 2014 with a new target deadline to be determined by the European Commission – although this is expected to be the end of 2014. Experience with the European Market Infrastructure Regulation (EMIR) process tells us that this may well be extended if there is significant push-back and questions from the industry. The current deadline for ESMA to draft technical standards for harmonised transaction reporting under MiFIR is Q4 2014, but this is already at risk due to lack of resources.

Therefore the earliest expected date for MiFID II implementation is 2016, but in truth it may be more realistic to expect a target date of 2017 for the directive and accompanying national legislation to take effect. MiFIR, although an EU regulation with immediate effect, is designed to be read and implemented alongside the MiFID II directive, so it would be reasonable to regard the two as taking effect at the same time. It remains to be seen whether this attitude will be taken by the national oversight authorities such as the Financial Conduct Authority (FCA) in the UK or whether they will expect some elements of MiFIR to take effect in 2014.

Whatever timeframe emerges, the forthcoming EP elections have ensured that the engines have been started on MiFID II and MiFIR. Industry participants will need to learn from the implementations of the Dodd-Frank Act and EMIR and hopefully avoid the last minute scramble for compliance, but this will also depend on ESMA publishing the technical standards in good time to enable member states to enact the relevant national legislation and the National Competent Authorities (NCAs) – for example the FCA in the UK - to prepare for supervision. The composition of the next EP may also result in attempts to amend or strengthen the measures under the regulation in terms of limiting the products and markets able to be traded. For the time being, market participants can do little more than watch events as they unfold. However, the industry should have its finger on the trigger, with firms ready to spring into action as soon as the intricacies are finalised.