For many, today is the first working day of 2017, which is also the original start date of MiFID II, before it was delayed by a year. With an eventful year behind us, what can we expect in the coming months, both on paper and in reality?
There is one year to go until MiFID II starts, on the 3rd January 2018. We can expect many announcements in the forms of legislation, for example through questions and answers, offerings from trading venues and vendors, and also in training, articles and comments. For those in energy and commodity trading, clarifications on RTS 20 and RTS 21 are of the utmost importance.
There are two obvious and distinct camps in terms of MiFID II: Those in the sector who must set up an Investment Firm, and everyone else. Those in the first category have a significant workload in the coming year. However even those in the second category will need a fully audited RTS 20 test result if using the Ancillary Activity exemption, and will need to comply with the position limits rules. It will also be necessary to ensure that no other “regulated activity” takes place which would cause an exemption loss.
MiFID II will also activate a few parts of MAR, such as the Emission Allowance Market Participant regime. The changes to the definition of a financial instrument in Annex I Section C will also have a knock on effect on other rules, such as EMIR.
In addition to MiFID II, there are other new rules in store for Europe. These include the Securities Financing Transaction Reporting (SFTR) rules which will have an impact on some commodity and energy traders, FinFrag, the Swiss version of EMIR, and the Benchmark Regulation, amongst others. We will also see the start of the uncleared margin rules for some market participants. There will be revisions to EMIR in Q4, and possible schemas changes to REMIT reporting, and no doubt much activity resulting from new clarifying documents such as Q+As and FAQs over the course of the year. And of course for many the changes coming out of Brexit will start to become apparent as well.
In addition to all of the above rules, a great deal of activity can be expected as a result of the “Winter Package“, announced late last year. We will see the details of the package fleshed out over the course of the year and hope to cover them on this blog.
While there will be many rules to track over the coming year, it is likely that a great deal of activity will be in other areas, in particular that of anti-abuse procedures and technology, driven by MAR and REMIT. The energy and commodity sector has seen an increase in anti-abuse process and procedure improvements, and also the upgrading of surveillance technology, over the last few months. This is due to several factors, including the start of MAR in July 2016, and an increase in REMIT related investigations and regulatory activity. We can expect the actual focus of many compliance departments to be a continuation of such work.
The journey to compliance maturity
We are now several years in to the “compliance journey” being experienced by the sector, which started in earnest with EMIR a few years ago. While there has been an obvious focus on “being ready” in time for the various deadlines, we are also seeing an increase in the maturity of compliance organisations within companies.
Rather than seeing rules as specific stand alone tasks that must be complied with, the approach is beginning to become more holistic. This thinking spans the governance, structure and size of compliance departments, the approach to technology being more strategic and also culturally. In September 2015, the UK’s Financial Conduct Authority published the results of a thematic review into attitudes and culture towards compliance in the commodity sector, and noted some room for improvement. In particular, the report highlighted an inadequate “anti-abuse” culture in the sector. There are many signs of this changing, triggered by regulations and activity by regulators, but being embraced across the sector.
Similarly, in terms of matters such as the reporting of data, updates to rules such as EMIR are beginning to orient the thought processes towards more strategic solution, in order to meet multiple and constantly changing requirements. The move to more clearing and margining that will undoubtedly come over the coming years will also necessitate more strategic thinking. This journey is now well and truly under way.
Where is all of this activity likely to take us, in more strategic terms? Will the coming of MiFID II at the beginning of next year take us to a plateau of regulatory activity? Or will the slew continue?
It is hard to tell which new regulations will hit us after 2017/2018. In terms of new financial regulations, those who remain outside of MiFID may well see a slowdown in rule making. The noises from the US also point to reduced rule making, due to the incoming administrations changed stance on financial regulation.
However, in the EU, Brexit is likely to cause some disruption in terms of rule implementation for many, although we do not yet know in which form. We also do not know if further political activity will drive more regulatory change.
On top of this, the changes announced in the Winter Package as well as the other activities in terms of non-financial regulation of the market, is likely to see an increase in activity. A reduction in one area of regulatory change, could simply be replaced an increase in other areas. In short, the stream of new regulations could continue to come at us, from one place or the other. Those who wish to successfully meet the challenge of compliance without unnecessary disruption will need to take a mature, measured and strategic approach to all of these changes.
This blog will continue to cover all of these rules as much as possible, by tracking rule changes, linking to interesting articles and providing comment. It will also reference any related commercial offerings of third parties on an unbiased basis, as they are made known to us.
We encourage all readers to send in additional links and news for publication, and look forward to keeping all informed of developments as they unfold.