EU poised to delay landmark financial markets reforms

The derivatives market was partly responsible for the financial collapse in 2007/2008 [Jonny White/ Flickr]

The European Union’s major reform of financial market rules faces a delay of a year to January 2018 to give the financial services industry more time to prepare, a senior European Commission official said on Tuesday (10 November).

The principles of the so-called MiFID II legislation, aimed at changing the way financial markets operate, were agreed at the global level during the 2007-09 financial crisis, with key changes including the move of private trading in derivative instruments onto electronic platforms to improve transparency and curbing the size of trading positions which can be taken in certain commodity markets.

The United States has already introduced extensive changes to market regulations under its Dodd-Frank Wall Street Reform and Consumer Protection Act and a delay in the European legislation would raise the prospect of distorting competition in some major cross-border markets.

Europe’s new Markets in Financial Instruments Directive II, which all banks, brokers and asset managers must comply with, also contains measures that are important to laying the groundwork for the EU’s capital markets union (CMU) project aimed at making it easier for European companies to raise funds in the capital markets instead of relying on bank lending.

But Martin Merlin, a director in the European Commission’s financial services unit, said the preliminary technical view was that a delay was needed, “if we want to have a smooth and effective implementation”.

“We will need to decide what the scope and duration for that delay should be,” Merlin told the European Parliament’s economic affairs committee. “Maybe the simplest and most legally sound approach would be to delay the whole package by one year.”

Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA), told the committee that a delay may be needed given the complexity for regulators, banks and brokers to adapt IT systems to the new rules in time for the 2017 start date. The new rules call for far more reporting of transactions to regulators.

The Investment Association, a UK trade body for asset managers, called in September for a one-year delay to rethink the new transparency rules for bond markets.

“The Commission’s public comments today are an indication of the scale of work for the whole marketplace to implement the many changes required under MiFID II, with particular regard to IT systems and coding,” said Richard Metcalfe, the Investment Association’s director of regulatory affairs.

Lobbyists happy

ESMA delivered over 900 pages of detailed rules to the European Commission in September in what the watchdog has called the EU’s biggest securities reform since MiFID 1 came into force in 2007 after also suffering a delay.

The EU executive has to scrutinise the documents while dealing with calls from lawmakers and member states to amend core elements like the size of the curbs on commodity positions, the extent of bond market transparency, and how far to bring the trading arms of energy companies within the scope of MiFID.

Parts of the reform could be delayed given it was now “unfeasible” to meet the timetable for some elements, Maijoor said.

There have been rumours of a delay for some weeks but confirmation from ESMA and the European Commission triggered anger among committee members who blamed foot-dragging at ESMA and the EU executive.

“I am more than just surprised that at this stage we are having this kind of discussion with the Commission and ESMA,” said Markus Ferber, the German centre-right lawmaker who steered MiFID through the European Parliament.

Anneliese Dodds, a British centre-left member said financial lobbyists will scent a chance to re-open hard-won compromises.

The financial industry will be happy with a delay, added Philippe Lamberts, a Belgian Green Party member. “I am not from the financial industry, I am a legislator and I am not amused at all,” Lamberts said.

But Merlin said it would be extremely dangerous to re-open MiFID and a delay would take the form of a simple legislative proposal to change the law’s start date.

EU lawmakers, ESMA and the European Commission will hold further meetings to discuss a delay. Backing from EU states would also be needed but Britain, France and Germany have already called for changes.

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