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
One priority for investors as the deadline nears 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 take part in the single market.
Without the regulators making a determination on equivalence, firms based in the EU will have to use European-listed instruments, even when doing so 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 is focused on making determinations on jurisdiction that impact the EU markets the most, which includes the US. It’s possible the initial authorizations will arrive in September, but there is anxiety among investors 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 behind it was to change trading in swaps from deals that are usually privately negotiated by banks to a more open, exchange-like market.
Now, the European Securities and Markets Authority has to determine what swaps will qualify and be subject to stricter pre- and post-trade transparency rules. Final technical guidance has yet to be issued, but 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.[irp]
These new regulations are meant to curb the volume of trading that banks engage in outside of exchanges on what are known as “dark pools.” European regulators want to move more of this trading into the exchanges, reversing a trend that was 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 move toward using this legal status, regulators fear it will lead to a rise in off-exchange networks intended for private trading, and they now want to change some rules to prevent any loopholes that could lead to this scenario. Participants in the market will have a year to fully comply with the new rules regarding this issue, however.
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.