The sweeping Mifid 2 regulations are approaching much faster than the financial industry would like.
This goes into effect on January 1, and there are specific challenges everyone will face, particularly investors.
The equivalence decisions
As the deadline nears, one priority for investors is European regulators recognizing which other countries have rules that they deem equivalent.
This will allow EU-based institutions to buy or sell securities on trading venues outside the EU and enable foreign-based investors to participate in the single market.
Without the regulators deciding on equivalence, firms in the EU will have to use European-listed instruments, even when it isn’t to their advantage.
Fund managers, for example, would have to buy or sell shares in giants like Amazon through the less-liquid listings in Germany rather than the main listing on New York’s Nasdaq.
Currently, the European Commission says it focuses on making determinations on the jurisdiction that impacts the EU markets the most, including the US.
The initial authorizations may arrive in September, but investors are anxious that regulators are simply cutting it too close.
The trading obligations
As boring as it sounds, the “trading obligation” question is crucial to defining Mifid II’s impact on the over-the-counter swaps market.
Intended to meet a commitment by G20 countries to ease systemic risk, this regulation stipulates that certain liquid and standardized derivatives are to be traded on the electronic marketplace.
The idea was to change trading in swaps from deals usually privately negotiated by banks to a more open, exchange-like market.
The European Securities and Markets Authority determines what swaps will qualify and be subject to stricter pre-and post-trade transparency rules. Final technical guidance has yet to be issued.
Still, some proposals shared by regulators in this area have already caused alarm, including whether dollar interest rate swaps qualify and what will happen with packaged transactions or deals with two or more parts that hinge on each other and must be executed at the same time.
These new regulations are meant to curb the volume of trading banks engage in outside of exchanges on what are known as “dark pools.”
Instead, European regulators want to move more of this trading into the exchanges, reversing a trend already in motion.
This has raised interest in “systematic internalizer,” a legal status for trading venues that allows institutions to trade off-exchange with lighter regulations.
As operators use this legal status, regulators fear it will lead to a rise in off-exchange networks intended for private trading.
They now want to change some rules to prevent any loopholes that could lead to this scenario.
However, participants in the market will have a year to fully comply with the new rules regarding this issue.
New issues are still emerging from the changes being made by these new regulations, so it’s crucial for investment firms and market participants to stay on top of all the developments as they happen.