MiFID II – how is it shaping up?

Following its rollout on 3 January, how is MiFID II working on the ground? It’s fair to say it’s not been completely smooth so far. The European Securities and Markets Authority (ESMA), which is the watchdog for the EU’s assorted markets, said there had been few problems on launch day, but despite repeated warnings, many firms were still unprepared right up to the wire.

And worse, some exchanges were so unprepared that they were given a compliance reprieve just as MiFID II came into effect. ICE Futures Europe, London Metal Exchange and Eurex have each been given a 30-month delay by regulators in the UK and Germany.

The UK regulator, the Financial Conduct Authority, said it had granted the extensions so as to ensure “orderly function” for clearing trades. However, with the UK likely to have left the EU in around 15 months’ time, and with a lack of clarity about how the UK’s relationship with the EU will look at that time, it’s anyone’s guess if the reprieve will be beneficial for cross-Channel clearing, as Britain may no longer be bound by MiFID II’s rules. There is a very real fear among financial institutions in mainland Europe that Brexit could trigger “financial instability regarding the open access provisions of MiFID II”, according to a Eurex spokesperson.

MiFID II – Reporting

Trading volumes were low on 2 January, the day before MiFID II came into effect – unsurprising as it was the first day of trading after the seasonal break. But on 3 January, trades were on average 24% lower than across December. By mid-January, however, some multi-dealer electronic platforms were reporting surges in trading bonds and interest-rate swaps. Credit market volumes have been reported as increasing by up to 70%, while European interest-rate swaps have risen by 104% over the average daily volume for 2017 and exchange-traded funds volumes were up by around 45%. It is clear that many investors are switching to electronic platforms as it is easier to meet MiFID II’s reporting requirements than trading over the counter.

In an unexpected move, ESMA has delayed the publication of data on “dark pool” volume caps, which limits the trading of stocks off public exchanges. This data will only become available from March. According to ESMA, the delay is down to exchanges supplying incomplete data and publication from 12 January – the intended date – would have resulted in a “biased picture covering only a very limited number of instruments and markets”. The dark pool caps have come into force anyway, but until March no one will know if a cap has been reached. The delay offers another opportunity, however, to become fully compliant for firms that still aren’t ready for MiFID II.

Some dark pools are suggesting that daily volumes have dropped to around 17%, from 25%, since 3 January. That’s unlikely to pick up until March, when data starts being published. There is also concern that ESMA may seek to close the systematic internalisers (SIs) loophole. SIs share a number of features with dark pools and have been popular with banks, which have been busy setting them ahead of the volume cap on dark pools. Equity trading through SIs currently accounts for around 20% of the market. ESMA’s consultation on SIs closes at the end of January and the regulator is expected to amend some of the rules on SIs to limit further migration from dark pools.

ESMA has also said it cannot rule out any further problems arising over the coming weeks.