Although there is still much uncertainty around where the post-Brexit divergence cards will fall, market participants expect a simplification of UK Mifid II transparency rules, according to sources.
The FCA’s decision to axe the share trading obligation (STO) and review double volume caps (DVCs) in April was a firm signal of the UK’s willingness to take a more liberal approach and remove some Mifid pain points.
As the Mifid Review process continues on the continent, and a separate review process gathers momentum in the UK, further opportunities for divergence will arise. Big announcements, such as the UK Treasury’s Wholesale Market Review expected in the summer and the EU’s own legislative proposals, are expected later this year.
See also: Mifid II review dont change too much
In short, 2021 will be pivotal in terms of the future of Mifid II and the relationship between the UK and EU.
“It is now common knowledge that the UK is not concerned with exact equivalence and is deliberately changing previously equivalent legislation,” Seb Barling, partner at Linklaters, told Practice Insight. “The counterpoint to the UK’s axing of the STO was Esma’s [European Securities and Markets Authority] final guidance on Mifid II data obligations, published last week.”
According to Barling, the aforementioned publication shows the EU still has appetite to make the Mifid II data reporting obligations more complicated, especially in terms of post-trade transparency and putting granular rules on data products. This signals a “more heavy-handed” and prescriptive European approach to transparency requirements.
Now the UK has left the EU, it is under no obligation to enact these or any other guidelines. Other sources contacted said the market was still attempting to “digest” the report – a familiar turn of phrase in the Mifid Review process, which has already generated its own miniature library. Some market participants have even dubbed the review process as Mifid II.5 or Mifid III to emphasise the scale of the changes in the pipe line.
Barling stressed the FCA’s forthcoming business plan, expected in July or August, to lay out a clearer map as to where divergence will take place.
“The STO move won’t move the dial enormously, though it will make execution a little simpler for firms,” Barling added. “However, if the UK moves further away, changing, for example, how firms have to deal with inducements or renumeration requirements, such moves will be cautiously welcomed. It is still early days, but firms are watching the developments very carefully.”
Meanwhile, Joe McHale, head of European government and regulatory affairs at Bloomberg, stressed the delicacy of the situation and a degree of caution on the UK’s side. “UK regulators have been very strategic in the way they have consistently stressed this is not a race to the bottom but a tailoring of the regime,” he said. “They’ve explained these words very carefully. They don’t want to be seen as a light touch but as a more ‘tailored approach’ to the specificities of London.”
See also: Primary markets worried about EU/UK Mifid-II divergence
Such a strategy makes sense in McHale’s mind. It is important to remember that Mifid II was designed for 28 member states with different legal systems and different sized capital markets. It was a one size fits all approach that allowed some scope for national difference.
“What the UK is doing now is maintaining parliamentary oversight while giving more powers to the FCA to define the rulebook,” McHale added. “That potentially could deliver more agile, reflexive and responsive rules without weakening investor protection.”
The fact that the UK played a key role in drawing up EU directives such as Mifid II before Brexit, and because it remains a member of Basel, IOSCO, and the FSB, means markets don’t expect a complete rewrite but an evolution with more proportionality and flexibility.
Uncertainty on the UK side
While it is fairly easy to predict the EU’s moves, all sources contacted stressed uncertainty on the UK side, as the FCA has yet to announce a firm direction of travel.
Although the Regulatory Initiatives Grid provides a decent overview of what the UK is planning in terms of regulation, what they prioritise and what the timelines are, the main document markets anticipate is the UK Treasury’s Wholesale Markets Review.
“Although the Wholesale Financial Markets section of the Grid flags that the wholesale markets review is taking place this year, it doesn’t really indicate whether this will result in significant divergence or not, so is still a one to watch,” said Barling. “So I think the document can flag areas where we may see divergence, but it is very much a case of ‘may’ see divergence rather than ‘will’.”
Julia Smithers Excell, partner at White and Case, also stressed the uncertainty. “We still don’t know what’s in the wholesale market review, although there have been some indications and speeches,” she said. “It will be interesting to see what the proposals will be. Later in the year there will be further consultations. The grid itself, although useful in showing the focus areas, doesn’t outline the details of the consultation.”
Like Barling, Smithers Excell highlighted recent UK actions to remove certain Mifid pain points, notably the best execution reports (RTS 27 and 28) and the open access regime for exchange traded derivatives, which was intended to help cross border capital markets and therefore has little use in a UK-only market.
See also: Post-Brexit regulatory divergence is imminent
Simplifying rules doesn’t necessarily ease post-Brexit complications. “The FCA is aware many firms prefer a harmonised regime with the EU, while some firms transaction report solely to the FCA and would prefer a lighter touch,” Simon Appleton, director of Mifid transaction reporting at Kaizen Reporting, told Practice Insight.
“We need to remember the FCA pushed many transaction reporting measures in the first place. I would think they are likely to adopt the vast majority of ESMA’s proposals in their final report in relation to transaction reporting.”
However, Appleton also said post-Brexit divergence was an opportunity to “have a bit more discretion, to listen to the market participants and think about what is good for UK markets and for the regulator, as opposed to the purely from an EU perspective”.
“We still haven’t heard much from the FCA,” Appleton added. “I expect the FCA will come out on this soon. It would be advantageous if the FCA changes come at the same time as EU changes, that way firms only have to adapt their systems once.”
Amid the uncertainty, a source suggested the most likely outcome to be a simpler “legacy Mifid II” in the UK and a “more complex Mifid III” on the continent.
A complicated puzzle
While the UK is expected to tweak and simplify as part of its “tailored approach”, it’s worth remembering that reducing the situation to “less rules equals more competitive market” is a gross oversimplification.
In this regard, market participants frequently mention three points.
First, the UK was a key driving force behind many Mifid II transparency initiatives in the first place, even if the final result of Mifid II is different to what the UK would have done, had it been free to create its own rulebook outside of Europe.
Second, market participants don’t want a bonfire of rules, since they have just spent the last three years going through a lot of pain adapting their systems and processes to the Mifid II market structure, as previously highlighted by Practice Insight
Third, even if the UK does simplify its own rulebook, that still means extra complexity at a global level, as global firms will now have to navigate two playbooks.
A recent poll by Kaizen Reporting suggests the extent to which the market is split on divergence in the Mifid II review process.
When asked how concerned they were about FCA and EU divergence on transaction reporting, 6.7% or respondents said there would be “no impact”, 15% not at all and would welcome divergence, 48% were slightly concerned, while 20% were worried”, and just 10% were very worried.
See also: Mifid II review to look at systematic internalisers
The mixed results of this poll indicate the immense challenges the FCA faces in navigating these choppy post-Brexit waters.
Whatever they do, it is unlikely to be universally embraced.
