Investors and regulators breathed a sigh of relief on Wednesday after the launch of the biggest shake-up of European markets in a decade passed without major upset.
Volumes in some markets dropped and the continent’s clearing industry was granted a last-minute reprieve from the rules, known as Mifid II, but fears that new IT systems would buckle and trading would evaporate proved unfounded.
Banks and brokers had worked around the clock in upgrading technology and testing new procedures to be ready for the ambitious set of reforms from Brussels that are intended to benefit investors by introducing more competition and transparency across European markets.
The 1.7m paragraphs of the updated Markets in Financial Instruments Directive, prompted by the financial crisis, covers all aspects of trading on EU markets, from payments for research to more protection of consumer rights.
Nicholas Russell, chief financial officer of financial services group Canaccord Genuity in London, said his firm had been working through the night and there had been no glitches internally or with clients. “It’s a light relief for those of us who have given up the past 12 months of our life working on this,” he said.
Steven Maijoor, who as chairman of the European Securities and Markets Authority has led the rollout of the legislation, cautioned that while the regulator had not seen any glitches, there could be issues “in the coming days or the coming weeks”.
Europe’s financial services industry is estimated to have spent more than €2.5bn preparing for Mifid II’s arrival, which began with the UK’s Financial Conduct Authority joining BaFin, Germany’s national regulator, in giving three of Europe’s key futures exchanges a further 30 months to implement the rules.
Eurex, Germany’s largest futures exchange, argued that the UK’s exit from the EU was a “game changer” for the futures exchanges and clearing houses given that Britain may not ultimately be bound by Mifid II’s proposals. The new rules were designed to deepen the links in the industry between London and the rest of Europe.
“The fact that [the delay] has been used is an indication of the expected impact of these provisions,” said Mr Maijoor said of clearing houses, which sit between two parties in a trade and manage the wider risk if one side defaults.
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As part of its push to increase transparency, Mifid II demands far more detailed reporting of trades and there were signs of depressed trading. Chris Barnes of data provider Clarus FT said the number of euro-denominated interest rate swaps being reported was “startlingly low”.
However equities volumes were little changed. According to Cboe Europe, just over €38bn of shares were traded on Europe’s exchanges on Wednesday, little different from recent monthly average daily volumes.
But less business was conducted in controversial off-exchange “dark pools”, a target for Mifid II. Instead many investors turned to auctions, where they can place orders at particular prices within a limited timeframe. Cboe traded nearly €190m of deals on Wednesday compared to its record December average of €37.5m a day.
Despite fears that the new rules could make it more onerous for companies and financial institutions to raise new debt, corporate bond bankers said Mifid II’s arrival caused little disruption. Institutions had carried out dry runs at the end of last year, where they allocated several deals in accordance with the new rules, and that it only added around 15 minutes to the process, one banker said.
But financial services executives cautioned this was only day one. “Work, debate and regulatory activity will continue throughout the first portion of 2018,” said Adrian Whelan, senior vice-president of regulatory intelligence at Brown Brothers Harriman, the private bank.