Mifid II: Three Months to Midnight

Jim Rundle

Time is running out for buy-side firms to get their houses in order, ahead of a wholesale revamp of Europe’s trading rulebook, James says.

There’s something about deadlines that most people don’t understand—it is a date or a time by which something has to happen. Anything else is merely a guideline, and the clue is in the name. That so many buy-side firms can’t seem to make the distinction is sobering, to say the least.

The problem becomes more acute with the revised Markets in Financial Instruments Directive (Mifid II). The scale and the frequency with which regulators are warning that time is running out shouldn’t just be setting alarm bells ringing—compliance departments should be flashing red like the bridge of the Enterprise when it’s under attack, and all hands should be at battle stations.

Yet that’s not the case. Even now, some shops are sleepily awaking to the realization that Mifid II is coming, and it’s coming soon—January 3, 2018. So, why has everyone left it to the last minute? I believe there are three primary reasons, sprinkled with a dash of human nature, in that most people tend to leave things to the last minute.

Where the Blame Lies

The first reason for this, and where much—but not all—of the blame lies, is with the European Parliament, Commission and Council, along with the European Securities and Markets Authority (Esma). Mifid II is a far-ranging and sweeping file to work on, touching nearly all asset classes and all aspects of the trading process to some extent, but last-minute wrangling between the Parliament and Commission over key aspects of the technical standards has confounded the industry. It’s also given it an excuse not to work on Mifid II or spend money where it can reasonably argue that it hasn’t a clue where to target resources.

The second reason is commentary from regulators such as the Financial Conduct Authority (FCA). The UK regulator has been one of the most vocal proponents of the industry being more prepared for Mifid II, but has tempered this in nearly every speech by saying it won’t crack down hard on those making a genuine effort. As such, several people I’ve spoken to have said they are making efforts, but expect forbearance to such a degree that January 3 isn’t really a “hard” deadline as such.

This is a dangerous assumption to make. While the FCA has indeed been saying that it won’t bring the full force of the regulatory weapons at its disposal to those who aren’t 100 percent compliant on day one, it hasn’t said that there will not be repercussions, either. Furthermore, it hasn’t defined the quantum by which it deems compliance levels to be acceptable—50 percent? 75 percent? 90 percent? There may be a few firms that will be in for a rude awakening come next year, and there will be little sympathy, I suspect, for those who cry foul.

The third is the lack of engagement by the buy side on the topic of Mifid II, whether it’s the smaller shops that are still subject to its rules in Europe but seem to be existing in some kind of fantasy world where the original Mifid was never revised, or US firms that will be forced to, at the very least, understand the requirements of Mifid II, and possibly even comply with elements themselves that go beyond the mere unbundling of research and execution costs. That many still seem deliberately unaware of basic provisions within the rules is frightening.

The Bulletin of the Atomic Scientists, a scientific journal, operates the famous Doomsday Clock, which gauges how close the world is to nuclear catastrophe. It is currently set at two-and-a-half minutes to midnight, meaning that it’s likely the fire is coming. A similar clock, sent to most industry journalists by Tradeweb, sits on my desk, counting down to January 3, 2018.

It’s currently at three months to midnight, but in industry terms, that may as well be minutes. The fire of Mifid II is approaching, and yet the buy side seems to be dousing itself in gasoline. As Mark Steward, executive director of enforcement for the FCA said in a speech at an industry conference on September 20, firms who have not done so, “need to take action now.” 

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