The industry is using its best efforts to ensure “day one” compliance. FIA and its members are working together to create a set of industry standards based on an agreed interpretation of the EU’s regulations.
“We have started the process of advising national competent authorities in each EU member state about how firms through no fault of their own might not be 100% compliant on January 3, either due to the delay in publication of final standards and/or outstanding areas of uncertainty – for example, with respect to indirect clearing, direct electronic access and various commodities requirements ” says the FIA’s Head of Europe Simon Puleston Jones.
He notes that the European Commission is only expected to publish the final regulatory technical standards for indirect clearing towards the end of September, for example.
Meanwhile many third-country firms have been surprised by how MiFID II will impact on their activities even though they are not based within the EU. They still have many questions about how the new rules will ultimately affect them and FIA is holding a series of webinars and calls to help promote a better awareness and understanding of third-country impacts in the US and Asia.
With just a few weeks to go until MiFID II becomes EU law, the FIA is still talking to regulators about the changes to transaction and commodity position reporting.
“We have surveyed our membership and most firms feel they will be compliant with the transaction reporting requirements from 3 January, but they are still encountering potential implementation issues with respect to data quality, data security regarding the storing and transmission of sensitive data and exchange readiness.”
When it comes to commodity position reporting there are a number of unclear issues for clearing members, says Puleston Jones.
“FIA members are concerned that the literal interpretation of the MiFID II requirements would imply reporting is required from the executing broker, regardless of whether that entity is also the clearing broker. As the executing broker has no visibility on future lifecycle events that impact the trade, only the clearing broker is in a position to perform such reporting obligations”.
He further notes challenges relating to identification and reporting of the end client, the excess regulatory burden of having to report “zero” positions. In the absence of a reporting field template published by ESMA, FIA has worked with its members to create an industry standard reporting schema to facilitate compliance with the commodity position limit reporting regime.
Direct electronic access
The FIA has also asked for more information on how direct electronic access (DEA) to trading venues will be governed.
Firms want to know how the new requirements will apply to exchange-traded derivatives. They need to understand, for instance, what is considered DEA, how the exemption process will work in different EU Member States and to what extent are third country firms subject to the requirements? There is also a need to remove the commodity position limit reporting obligation to C.10 non-commodity contracts such as inflation swaps, to align with changes made to the commodition position limit regime.
Concerns have also been raised by FIA regarding the operation of the ”ancillary activities” exemption. Not all commodity firms met the FCA’s application deadline for MiFID II authorisation as an investment firm. If those firms are not authorised in the UK by January 3 2018, they will commit a criminal offence if they continue to trade from that date and any trades entered into by them will be voidable – a problem not only for them, but also their counterparties.
Some countries, including Germany and Italy, have reacted to this potential problem by introducing a transition period and the FIA is in discussions with HM Treasury and UK regulators to promote the adoption of a similar solution.
“In many areas, the industry is more or less ready for MiFID II. The remaining issues that we have highlighted have been out for discussion for a long time and need to be addressed quickly if firms are to be compliant from the date of go-live” says Puleston Jones. “As 3 January approaches, trade bodies such as FIA perform a key role in helping their members reach a consensus on how to implement the requirements – notwithstanding the outstanding areas of uncertainty, doing nothing is not an option as the FCA expects firms to use their best efforts to ensure compliance.”