MiFID II Delay: When in Doubt, Play the Technology Card

I am shocked—shocked—to hear that MiFID II is likely to be delayed after a successful campaign by industry lobbyists. 

Today it was announced that the European Union and the European Commission have agreed that a delay for MiFID II's January 3, 2017, start date is necessary.

Much more will need to be hammered out in the wake of this unsurprising news, but it would appear that financial services firms will gain some valuable breathing room when answering demands stemming from this sweeping mandate.

Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA), said in a statement directed at the European Parliament, that IT topped the list of concerns when it came to meeting the deadline.

"I am not going to surprise anybody in the room when saying that the timing for stakeholders and regulators alike to implement the rules and build the necessary IT systems is extremely tight. ... The building of some complex IT systems can only really take off when the final details are firmly set in the regulatory technical standards and some of the most complex IT systems would need at least a year to be built."

The European Commission agrees.

Look to the Tech

MiFID II, as an overhaul, is incredibly complex. Consider this explanation from the UK Financial Conduct Authority (FCA):

MiFID II comprises two levels of European legislation. The EU Parliament voted on MiFID II ‘Level 1' in April 2014, the framework legislation comprised of two linked pieces of legislation:

MiFID II and the Markets in Financial Instruments Regulation (MiFIR). There is provision in a wide range of areas for the framework legislation to be supplemented by implementing measures, so-called ‘Level 2 legislation,' which takes two forms:

• ‘delegated acts' which are drafted by the European Commission (EC) on the basis of advice by the European Securities and Markets Authority (ESMA), and
• ‘technical standards' which are drafted by ESMA and approved by the EC

There are a lot of acronyms involved in this monolith and it impacts many fragmented markets.

In a September feature, Waters looked at how the minutiae and technicalities of the 450-page MiFID II document were leaving industry participants perplexed. So even though the delay is certainly a big deal, it's far from a surprise.

After the delay was announced today, my London-based colleague David Dawkins polled several vendors for immediate feedback about what it means. Unsurprisingly, there was universal agreement that this is for the best.

I would wholeheartedly agree, but after watching the implementation of the Dodd–Frank Act in the US, I also can't help but think investment houses were betting on a delay. I also have no doubt that if this deadline is pushed back to Jan. 3, 2018—or earlier or later—industry lobbyists will once again be begging for more time, and "IT problems" will again crop up.

Here's a simple fact: If you think that developing a sweeping set of rules to govern finance over a continent is complex, the technology underpinning those mandates, and ensuring compliance and reporting, is even more complex.

As a result, when you want to push for a delay the best course of action is to blame the technology and hope that everyone in the room starts nodding their heads in agreement.

Rinse and Repeat

This reminds me of a conversation I had with former Commodity Futures Trading Commission (CFTC) commissioner Scott O'Malia. Back in 2013, I caught up with him and other regulators for a feature about the infrastructure investments they were making to answer new Dodd–Frank reporting requirements. O'Malia was frank ... and flabbergasted.

"We've historically, and chronically, under-invested in technology—we haven't used technology to advance our oversight and expand our capabilities," O'Malia said. "Until now, we've had a 20th century regulatory scheme for a 21st century market. It's not working for us. It's not sustainable for us. It's too labor-intensive and it's not doing enough to leverage technology."

He was right then, just as investment firms are right today ... the technology is hard.

This delay is likely for the best. Just don't be surprised when this time next year, industry participants are still dealing with the same IT difficulties.