With the publication of the final MiFID II/MiFIR RTS (Regulatory Technical Standard) hopefully approaching, seven industry associations have written a letter (here) to the European Commissioner outlining their concerns about the possible impact of MiFID II on the industry.
There has been a great deal of push-back over the year. This letter may be the final opportunity for the industry to express its view before the RTS is published. The main theme is the concern that too many market participants will lose their MiFID exemptions (due to the removal of the blanket commodity trader exemption and tightening of the ancillary activity exemption). The consequence of such loss is that the firm becomes “MiFID regulated” and will need to comply with many more rules, such as CRD IV. They would also have the status of Financial Counterparty(FC) under EMIR and be subject to mandatory clearing.
The letter specifically addresses several topics:
Ancillary activity – There is push back on the most recent proposals for the “ancillary activity” test. The original tests, which were published in the draft RTS, had a test both on the proportion of the firm’s trading activity and size of market traded. The latter was set at a very low level. A revised proposal removed the first test and adopted a “matrix” approach in terms of market size, out of which there would be “winners and losers”. There is push back against all of these, claiming that the rules are still too onerous and will capture too many firms. There is also discussion on the transitional arrangements, especially the data-set on which the tests must initially be performed (the last year of data). The letter argues that firms should have the chance of restructure their activity before the tests are carried out.
Position limits – There are more suggestions on how the proposed position limits regime should be modified. This topic is wide ranging since if affects firms regardless of whether they are “in” or “out” of MiFID. The letter argues that the proposals suit the way the industry actually runs.
Pre and post trade transparency and non discriminatory access – These blanket provisions in MiFID II/MiFIR are not always deemed to be appropriate to the industry. The concern of liquidity fragmentation is expressed as well as other matters.
Prudential supervision – It is argued that the “commodity dealer” regime within financial regulation should be better tailored to the industry. It is also requested that the current exemption from CRD IV to the end of 2017 be extended by 3 years. There are also requests to make the capital regime more appropriate.
With the final RTS due imminently, we are at the final stages of the battle over the extent that financial regulation will apply to energy and commodity trading. While there has been a great deal of push back, the signs are that the financial regulators feel that more such regulation is necessary. These signs include ESMA’s proposals within the EMIR review, and the FCAs recent market study. The industry is therefore awaiting the RTS with baited breath.