THE MIFID/EMIR, BOND.

Daniel Simpson, research analyst at JWG examines the cross-over between these two major pieces of regulation.

MiFID II, just like the European Market Infrastructure Regulation (EMIR) before it, is set to change the rules governing trading in the European Union (EU) forcing the whole industry to make seismic alterations to their operations. Managing these fundamental changes will present a number of huge challenges making the original MiFID’s implementation seem straightforward by comparison.
Unlike its predecessor, MiFID II will be implemented alongside approximately fifty concurrent legislative global initiatives which will impact the way firms need to instigate the new rules. Like its forerunner, however, and unlike EMIR, there is no legislative scope for MiFID II to be delayed, so this implementation must be completed by the 3 January 2017 deadline.
The objectives behind MiFID II, fuelled by the G20’s aggressive regulatory reform agenda set down in Pittsburgh in 2009, are far more ambitious than those of its original incarnation. MiFID II moves away from focusing on the protection of individual investors or the conduct of individual firms and concerns itself with the overall stability and efficiency of the financial system in the EU in its entirety. These substantially broader primary objectives have resulted in a much more extensive set of rules which will have a wider, more invasive effect on the markets.

MiFID II will force firms to make far-reaching strategic decisions about the types of business they engage in, and the ways in which they participate in them, post implementation given the totally unprecedented requirements. One such case will involve the new post-trade rules. Key developments include the introduction of Consolidated Tape Providers (CTPs) and new rules around clearing and access rights. However, before delving too deeply into these new rules, it is worth placing them into the context from which they will be implemented; that is to say, the other major piece of European legislation radically reshaping post-trade structures – EMIR, as well as other interlinked themes, such as transaction and trade reporting.

EMIR is arguably the most significant of the aforementioned 50 initiatives that are concurrent with MiFID II in terms of the scale of interdependencies, and therefore, implementation teams must focus on finding areas where efficiencies can be found by implementing the two side-by-side. With this in mind, the EMIR context must be an important consideration when contemplating MiFID II implementation.

As we have previously covered in Best Execution, the main area of focus currently, in terms of EMIR, is the substantial data quality problems being experienced in trade reporting. In an attempt to address these problems, as of 1 December, new data quality rules came into force, following the Fifth Implementation Progress Report of the G20 Data Gaps Initiative (DGI), published in September by the Financial Stability Board. The DGI began in the aftermath of the crisis and was designed to improve financial data globally, in order to allow more effective assessment and intervention from regulators.

Progress in the making?

Whilst the report states, perhaps optimistically, that ìsignificant progress has been made in implementing the DGI recommendations”, it is also apparent that there is still huge scope for improvement and that making these in a timely manner could be crucial in enabling regulators to spot the next crisis before it happens.

An interesting side-note here is how these serious and widespread data problems will play into the fact that, in the UK, the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) are proposing some fundamental changes to regulatory accountability. These include the ‘Senior Managers Regime’ which will require firms to allocate a specific range of responsibilities to designated individuals. These individuals will then potentially be held accountable if their firm contravenes a requirement within their area of responsibility, and by ‘accountable’, they do mean potentially criminally liable. The question being, who – if anyone – will be willing to take on that legal responsibility for the accuracy of reports in the current environment? The only thing that is certain is that they will need to be individuals with access to significant enough resources to tackle a problem which is deeply entrenched.

There have been two other recent developments with EMIR. Firstly, on 10 November, the European Securities and Markets Authority (ESMA) unleashed a fresh consultation paper on trade reporting, unveiling plans to overhaul the entire regime, including increasing the number of counterparty data fields from 26 to 32. The most troubling additions were arguably the ETD transaction reference number, the extension of NFC details and the mandating of the LEI.
The other change has been the delay of the clearing obligation under EMIR, with ESMA’s draft Regulatory Technical Standards (RTS) on interest rate derivatives still undergoing Commission assessment. On 20 November, ESMA chair, Steven Maijoor, wrote to the Commission stating that ESMA would delay delivery of their regulatory technical standards (RTS) on the clearing obligation until the assessment has been finalised.

In the post-trade space, clearing is, perhaps, where there is the greatest crossover between EMIR and MiFID II. Over the past year, since the EMIR implementation deadline rolled past, there has been much debate on exactly which derivative trades are subject to mandatory clearing, and ESMA has published two consultation papers on the subject. We are now relatively certain – by recent standards at least – what is exempt (e.g. covered bonds) and what is not but, just as the dust settles on that debate, MiFID II is adding further twists.

The trading obligation for derivatives under MiFID II will force trades, which are covered by the EMIR clearing obligation and deemed sufficiently liquid, to be traded on-exchange. On top of this, MiFID II requires the removal of commercial barriers around clearing houses, obliging them to clear trades on a transparent and non-discriminatory basis, with some, rather complex, qualifications. In addition, there are ongoing ESMA consultations on the definition of a derivative under MiFID, and the definition of FX under both MiFID and EMIR.

The central point here is that clearing is just one of many areas in which MiFID II is intertwined with EMIR, and EMIR is just one of many legislative initiatives that is interdependent with MiFID II. Others include, the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT), Securities Financing Transactions (SFTR), Bank Recovery and Resolution Directive (BRRD), Capital Requirements Directive IV, Market Abuse Directive (MAD/MAR), but there are many, many more. In other words … expect interdependencies to be a topic which crops up more and more in regulatory debates throughout 2015.

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