Europe’s biggest markets regulatory shake-up for a decade was overshadowed on its debut on Wednesday as the UK and Germany granted last-minute reprieves to the continent’s biggest futures exchanges to implement the rules.
Underlining the complexity of the Mifid II reforms that touch on everything from the cost of analysts’ research to the trading of equities, ICE Futures Europe and the London Metal Exchange were given an extra 30 months to comply with rules related to trading and clearing on the very day they were due to come into force.
Eurex, the Frankfurt-based futures exchange owned by Deutsche Börse, was given a similar delay late on Tuesday by BaFin, Germany’s national regulator.
The proposed reforms of Europe’s clearing industry would potentially increase the links between London and the rest of the EU, which is particularly contentious given that the shape of the UK’s relationship once it leaves the trading bloc is unclear. Clearing houses sit between two parties in a trade and manage the wider risk if one side defaults.
The reprieves only apply to one part of the sprawling Mifid II legislation that has been almost a decade in the making and is designed to bring more transparency and competition to financial markets in Europe. The UK’s Financial Conduct Authority, which only assumed the powers to grant a delay on Wednesday, said the extension was to ensure the “orderly function” of clearing in Europe.
“In truth, keeping up with all of the rule changes, updates and reprieves is absolutely brutal,” said Jake Green, regulation partner at law firm Ashurst, citing announcements from UK and German regulators. “You need the ability to identify all the changes — which is impossible to master — and then work out how they track through legally, operationally and commercially.”
Banks and brokers had predicted the changes required by Mifid II, which include more detailed reporting of trades across a range of asset classes, could depress trading volumes throughout January as the reforms take effect. Data from Trax, a subsidiary of bond-trading platform MarketAxess, pointed to an immediate impact. As of mid-morning in London on Wednesday, Trax had recorded just €8.6bn worth of trades in euro-denominated sovereign bonds, 24.5 per cent lower than the average over the past 30 days.
Europe’s financial services industry had scrambled to be ready for the arrival of Mifid II, which is expected to cost the finance industry more than €2.5bn to implement, with the largest banks spending more than €40m each on compliance, according to estimates by Opimas, the consultancy.
One senior executive at an investment banking group said his firm been working through the night to be ready, with a focus on “general connectivity and infrastructure” as well as extra reporting requirements.
However, so far on Wednesday there had been no glitches internally or with clients and it was business as usual, he said. “It’s a light relief for those of us who have given up the past 12 months of our life working on this . . . It’s safe to say Christmas was cancelled this year.”
Steven Maijoor, the chairman of the European Securities and Markets Authority, said the regulator had seen “no glitches so far” in the rollout, but cautioned that the possibility of issues “in the coming days or the coming weeks” could not be ruled out.
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The changes to proposed to the clearing industry are “a very important element of Mifid II”, he added. “The fact that [the delay] has been used is an indication of the expected impact of these provisions.”
In an effort to introduce more competition in the trading and clearing of futures, Mifid II would for the first time have allowed an investor to open a futures trade on one exchange and close it on another.
In securing its delay, Eurex argued that the exit of the UK — Europe’s largest market for clearing derivatives — from the EU introduced too much uncertainty given that Britain might not be bound by the rules once it leaves.
“Brexit is a game changer,” Eurex said. “We share industry concerns around financial stability regarding the open access provisions of Mifid II.”
With reporting by Nicholas Megaw
* This article has been amended since original publication to reflect the correct name of the UK financial regulator, the Financial Conduct Authority