At CMP, we have been involved in a number of MiFID II projects over the last couple of years. This has been most interesting, but has certainly also had its frustrating moments. Now that the initial deadline has passed, we have taken a bit of time to reflect on the processes between the supervisors and the supervised when implementing such large scale regulatory projects.
January 3rd has come and passed, and with that the deadline for MiFID II. So, what happened? Well, in quite a few areas, the jury is still out – it´s simply too early to tell. So, for now, this blog will focus on the process leading up to the implementation deadline.
By Peter Jørn Jensen, Senior Manager, Asbjørn Leeth, Manager, Michael Bønnerup, Manager, Jakob Werner Carlsen, Manager, Michael Gaihede, Manager, Tina Krøyer Jacobsson, Manager, Henning Skov Jensen, Manager, Jan Mikkelsen, Manager, Martin Sellebjerg, Manager, Fredrik Alsin, Senior Consultant, Alexander Beck Papadoulis, Consultant & Christian Thygesen, Managing Partner, | 5th March 2018
Meeting the Deadline
In the EU, the trend in financial regulation is crystal clear: Directives are out, and the directly applicable regulations are in.
Given the cross-border, and in many cases even global, nature of the financial markets, this makes a lot of sense, but from a processual/practical point of view it has some inherent weaknesses.
Paradox of the Structural Problem
ESMA is entrusted with all level 2 and 3 legislation, and thus with the interpretation of the will of the legislators. This puts the national regulators in an awkward position. They are the natural counterpart for the institutions they oversee, but they are not in the position to answer any practical questions on how to actually understand and implement this complex body of law.
I believe the Danish FSA is generally recognized as doing the best possible under the circumstances, but that does not change the structural problem – they must respect the division of labor and with it ESMA´s monopoly on providing final answers on all detailed matters.
Trying to Guess the Solutions
When not getting any help, the only alternative is for the banks to guess. Sometimes they succeed in doing so, collectively through the intense work of the committees and working groups, e.g. under the Danish bankers´ association, sometimes they fail to do so, as illustrated by the variety of solutions for pre-trade cost transparency.
(Try checking Jyske and Danske’s web bank to get an understanding of the breath of solutions. And if you have access to trading derivatives, you will discover that some banks give you no cost information at all, neither pre- or post-trade, out of fear of seeming expensive to their competitors.)
Even when they succeed, this will mostly only be a consensus on the national level, and it will invariably be an expression of the lowest common denominator.
Scrutiny and Punishment
What can we get away with without exposing ourselves to too much scrutiny and punishment by the regulators? It will not be an expression of the legislators’ intentions as was supposedly the idea.
And so, it is up to ESMA to provide detailed answers and guidelines to ensure meaningful and homogeneous implementation. Credit should be given to ESMA for being on a positive trend.
A good example is the guideline for trade reporting under MiFIR, which is incomparably more useful than the guidance provided to market participants prior to the implementation of trade & position reporting under EMIR. This being said, the speed, coverage and accuracy of ESMA guidelines and Q&As still leave a lot to be desired!
Understanding the Results of the Actions
When being involved in the actual implementation projects across the Danish banker sector, one must sometimes wonder if legislators understand the result of their actions – or lack thereof.
Do they understand, how poisonous it is for running a project to have an ever-changing scope?
How difficult it makes the case for starting early and doing things properly?
How exasperating it is for the business analyst, the technical analyst, the test manager, the project manager to call everybody back to the drawing board for the redesign of some feature, that was already fully functional and ready to be implemented?
How much it fuels the arguments of the cynics, who would rather simply wait – ideally to after the deadline for implementation has passed – to even launch the project?
How it even hurts the credibility of the financial sector at large, that they go out to their customers and demand for them to acquire a LEI, just to be told in November that this was in fact not necessary.
(And this latter example cannot even be blamed on ESMA – it was our very own FSA that was a little bit late in determining that so-called “enkeltmandsvirksomheder” did not need a LEI, even if they were registered under a CVR-number, breaking down a core logic of validating the identity of parts to trades in MiFID instruments.)
A Positive Trend towards Better Regulation of the Financial Sector
We believe there is general acceptance of the need for better regulation of the financial sector.
However, although there is a positive trend in the process of formulating regulation on the practical level, the process remains far from ideal. The effect is detrimental to the aim of the regulation and the regulators.
Lack of practical guidance means that legislation is either not implemented at all, or is being implemented significantly later than expected, at far higher cost than necessary, in a heterogeneous manner. All of this is detrimental to the overall effect, hurting the cooperation between regulators and the regulated, the credibility of the sector at large and giving a voice to those critical of supra-national legislation.
It seems a lose-lose situation for all those interested in effective, international legislation and transparent markets.
Can we not do that better?
Rumors have it, that the Commission is already warming up to MiFID III…
Christian Thygesen, managing partner
Christian Thygesen has been employed in the financial sector since joining the Danish Central Bank in 1992. From 1998 to 2002 he worked for the European Central Bank in Frankfurt, dealing first with financial infrastructure monitoring and then monetary policy in the office of capital markets and financial infrastructure. From 2002 to 2007 he was Head of Projects & Analysis at Roskilde Bank.
Since then he has worked as a consultant in the capital markets area with focus on efficient implementation of regulation and system selection in its many guises.