Julian Allen-Ellis, director at the UK-based Association
for Financial Markets in Europe (Afme), highlights some of the
positive aspects of Mifid II but warns of a few very real
risks. Among them is the possibility that Mifid II will lead to
less harmonisation between European countries than there was
before. He also raises the concern that Brexit negotiations
could be influencing the way certain Mifid II risks, such as
third country issues, are (or are not) being debated. Positive
or negative, says Allen-Ellis, the new rules pose a paradigm
shift in the market.
How ready are the financial markets in Europe for the
implementation of Mifid II?
Afme is the voice of Europe's wholesale financial markets.
In the round, the wholesale markets are in an advanced state of
readiness for this paradigm shift. However, the wholesale
markets are only part of the whole financial markets ecosystem.
Where we will probably see the highest level of unpreparedness
will be in second order impacts. The first order impacts are
where Mifid bites directly on Mifid investment firms. Those
firms that may be caught, perhaps slightly unawares, by the
second order impacts include counterparties and investors
outside the EU, where some extraterritorial effects of Mifid II
will make themselves felt.
Wholesale banks themselves, Afme members, are used to
dealing with onerous regulatory change; they are used to
dealing with uncertainty and interpretive legal questions. They
are old hands at dealing with complex, human capital and
technology intensive challenges. Our members are in a good
place and are as prepared as they can be.
At this late stage in the process, what are the biggest
remaining areas of confusion or concern?
Market participants have been poring over the text around
the share trading obligation and the implications that has on a
firm's ability to reach the deepest pools of liquidity
globally. The industry has coalesced around a workable
consensus view but it has been and continues to be a serious
interpretative and implementation challenge. The definition of
a systemic internaliser (SI) and the availability of the
requisite data to identify at a sufficiently granular level who
is an SI at an instrument by instrument level remains a key
challenge. An industry solution to this conundrum has been
There are a lot of questions around post-trade transparency,
particularly in the absence of any core reference data
including granular SI identity data. This leaves open the
fundamental questions – who is responsible for trade
reporting? And what are the implications for a firms'
decision-making logic in trade reporting; bearing in mind that
under- or over-reporting may be problematic given a strict
reading of the texts?
Mifid II could have the result of making EU financial
regulation less harmonised than under Mifid I
The whole area of investment research unbundling and
inducements is fraught with uncertainty. There is a clash with
the SEC rules over the Mifid II requirement to unbundle payment
for research and commissions, and many of the details about
timings and operational procedures are still very unclear. What
precise level of service, information transfer or dialogue
should be deemed an inducement? What level of service,
information transfer or dialogue should be deemed a minor
non-monetary benefit and therefore acceptable? The treatment of
FICC research is a particularly vexed area.
Deferrals are another huge problem. The fact that the
national competent authorities can choose individually between
deferral periods from two days to four weeks is a concern in
terms of achieving pan-European harmonisation. Firms are also
expected to produce very detailed and onerous cost and charges
reports to their clients, including wholesale clients, but the
text is very vague and open to differing interpretations in the
market. There is little consensus on how to achieve compliance
on costs on charges and the European Securities and Markets
Authority (Esma) is allegedly looking at releasing a further
Q&A on this area, with only 15 weeks to go. It would be
extremely unhelpful if it contained substantive changes for
implementation at this late hour.
Another concern we have is that all counterparties to Mifid
investment firms will need to have a LEI (Legal Entity
Identifier). The catchphrase we have been using here is: "no
LEI, no trade". Finally, the requirement to report certain
personal details for transaction reporting and for venue order
recordkeeping. This requirement may well have regulatory
clashes in third countries outside the EU. If a transaction
report must contain personal data and your counterparty is in a
jurisdiction where collecting that data is not allowed, then
you inevitably have a regulatory clash.
This list is only a high-level fly-by of the key concerns of
the wholesale banking community.
What could be the consequence of deviations in application
between the countries in the Europe 28?
That is a key point. We mentioned deferrals and the fact
that the text gives national authorities the ability to set the
deferrals period, so that area well end up as non-harmonised.
We certainly would not like to see a patchwork approach to
deferrals across Europe, as that would have a very
non-standardising impact and would require firms to adopt
different operational processes in different jurisdictions. We
do not think that this outcome is in any way beneficial.
Overall, the Mifid II text has been written in such a way
that it has required a lot of interpretive work around many of
the core elements of the text. The interpretive work around the
definitions, the scope of its application and the actual intent
of the text vary from law firm to law firm let alone from
regulator to regulator. In many cases we fear that the
interpretations will not be common across Europe and therefore
Mifid II could have the result of making EU financial
regulation less harmonised than under Mifid I. This is a very
real potential consequence.
Will Mifid II change the composition of the financial
markets in Europe?
Yes, absolutely. It is undoubted that there will be
fundamental impacts on the financial services industry across
Europe and globally as a result of Mifid II. The market will,
as always, adapt and evolve to the new paradigm post-Mifid II
implementation. Paradigm shift is an over-used term, but in
this case, it is truly apt. I think the composition of
financial markets will reconfigure significantly in reaction to
the new regulations. Financial players and markets are very
adept at reacting to new environments and the ecosystem is
fundamentally in flux. Market participants are going to evolve
to make the most out of the positive elements, including
increased transparency, and also to negate the effects of the
negative developments, in terms of increased cost, regulatory
burden and the many unintended consequences that are
Does this mean the same players acting differently, or
There will be winners and losers. Those that adapt best to
the opportunities in the new post Mifid world will thrive and
those that do not adapt well are at risk of becoming less
relevant in the market.
Will Mifid II have an impact on the competitiveness of the
European market on the global level?
Financial markets are incredibly fluid and technology
enables firms to locate themselves and network themselves
globally and therefore their activity can shift across borders
seamlessly. If there is a growth in the frictional cost of
doing business in one jurisdiction, then it is only natural
that business will flow to areas of less frictional cost.
It is important not only to consider the challenges of Mifid
II. Mifid II presents opportunities. Its policy objectives are
to increase transparency; concentrate trading on venue; make
research costs transparent; and improve best execution. These
objectives are intended to be enhancements to the market
– but they do not come without associated costs and
consequences, both intended and unintended. It remains to be
seen if the benefits outweigh the costs or vice versa.
Has Brexit had any impact on the shaping of Mifid II and if
so what is that impact?
Brexit has a profound effect on Mifid II. "Third country"
refers to jurisdictions outside of the EU and "third country
firms" refers to entities incorporated outside the EU in a
third country, whether they seek to do business by way of a
branch in the EU or on a cross-border basis. Within a review of
Mifid, the European Commission attempted to create a harmonised
regime for granting access to EU markets for firms in third
countries. This could be a very useful and is a very
internationalist agenda of the EU. It is a good idea all round
for financial markets to allow flows in and out of the EU. One
unintended consequence of Brexit and Mifid II is that by and
large Esma is not tackling third country issues due to
political sensitivities in light of the UK's Brexit
negotiations. The UK is going to become a third country,
according to current government Brexit policy, and we are not
at all optimistic that third country issues will advance in
2017 or before the UK becomes a third country and leaves the
EU. That impacts both Brexit and Mifid II, because other
potential third countries that want to have access to the
markets and vice versa are being cut off. I think that is a
very serious impact.
Do you think that Mifid II will substantially achieve its
aim of protecting the end user?
The increase in pre- and post-trade transparency and the
increased data that regulators will receive for monitoring
markets was intended to deliver an overall implied benefit to
the end client. However, I would question whether the cost of
delivering that is proportional.
What sorts of conversations have you had with your sister
organisations under the Global Financial Markets Association
We have had to coordinate like never before with the Asia
Securities Industry and Financial Markets Association (Asifma)
and Securities Industry and Financial Markets Association
(Sifma) in the US to discuss the second order impacts, to kill
a lot of myths that Mifid II applies directly outside of Europe
and to educate firms on the potential regulatory clash around
research unbundling, inducing clients, LEIs and personal data
regimes in third countries. Another third country impact is
that the share trading obligation has a requirement for venues
to be assessed on a case by case basis for equivalence for the
purpose of the share trading obligation. A big outstanding area
is determining which venues globally are going to be assessed
as equivalent for the purposes of the share trading obligation
and therefore which can our members still continue to reach out
to internationally outside Europe. The EC and Esma are
generating those lists and undertaking work to identify those
third country venues; but we do not know how many there will
be. We have submitted our wish list and we hope that we get
those venues that our members rely on for executing trades,
serving their customers and offsetting risk and increasing
Director, Association for Financial
Markets in Europe (Afme)
T: +44 (0)20 3 828 2690
Julian Allen-Ellis leads the cross-product
Mifid/Mifir steering committee at Afme. Allen-Ellis has
a broad product background in both fixed income and
equities. Before joining Afme, he worked for Market
Axess/TRAX in a senior sales and relationship
management role responsible for market participants
utilising Mifid/Mifir regulatory reporting and trade
matching services. Prior to that, he was in senior
relationship management in the prime services teams at
JP Morgan and Bank of America Merrill Lynch, and prior
to was head of membership at the London Stock Exchange
(LSE). Allen-Ellis read Economics at The University of
Reading and has an MBA from Henley Business School.