Speech by David Lawton, Director of Markets Policy and International, FCA, delivered at the FCA MiFID II Conference, London. This is the text of the speech as drafted, which may differ from the delivered version.
Thank you Nick and welcome everyone to today’s conference. My name is David Lawton, and I’m the Director of Markets Policy and International at the FCA – one of the main areas working on the policy for MiFID II.
To say that MiFID II will change the way European markets operate in future is without doubt hugely underplaying the likely impact of this legislation. From new transparency regimes for equity and, for the first time, non-equity trading, regulation of new entities like OTFs and authorisation of firms utilising high-frequency trading, strengthened conduct of business requirements and disclosures, to caps on dark trading of equities and positions limits for commodity derivatives.
Making these changes work is crucial as we seek to make European markets more transparent, efficient, attractive and safer to invest in.
For some of you this will be the second year in a row you’ve sat in this room to hear me and FCA colleagues talk about MiFID II. Last year, the framework legislation – the amended Directive and the Regulation – was fairly new and we spent our time talking about the high-level provisions and the initial direction of the work on the implementing measures. Today’s conference, by contrast, marks a big step further down the road towards our destination. Final technical rules and implementation.
The purpose of today’s event is to talk to you all about the draft technical standards and delegated acts – the implementing measures – that are now starting to be published, and reach a more finalised state. We will be talking, at times in some detail, about the final rulebook for MiFID II: what comes next, the challenges that national regulators like the FCA face, and also what challenges we see for industry participants like yourselves. We have arranged breakout sessions throughout the day with our policy experts on different key topics, and will conclude with a panel of regulators and policymakers talking more generally about how implementation will look across the EU.
Making these changes work is crucial as we seek to make European markets more transparent, efficient, attractive and safer to invest in.
Of course, today’s conference isn’t the only time we’ll be communicating with you regarding MiFID II. We know that this legislation has huge impact on the industry and thus is a major priority for the FCA. We therefore have plans on how we’ll continue to inform and consult with you, the industry, about future changes, and provide help wherever we can. I’ll come back to this shortly.
In my remarks this morning I will speak first about the timetable for the next couple of years, cover our engagement plans and then briefly comment on just a couple of the more topical of the issues from the 1,500 pages of draft regulatory technical standards and associated commentary that were published three weeks ago.
However, before I dive into these issues you’ve come to hear about, I just want to cover off a few scene-setting points, to help set your expectations.
First, today’s conference is designed to give you a view on the rules and timelines as we see them today. You’ll appreciate though that this remains a moving target. As the Commission, Parliament and Council have not yet given full blessing to the technical standards and delegated acts, which will apply directly or on which our domestic rules are largely dependent. So what we will be doing today is giving you a view of the road ahead and where we believe it will go next – hopefully useful for planning purposes, but shouldn’t be considered the final word on these topics.
Second, we are talking today about implementation challenges and technical rules. To cover the large amount of materials we hope to get through, it will be impossible to start at the very beginning. We will therefore assume quite a bit of prior knowledge of the primary legislation and the thinking behind it. This is not MiFID II 101.
Third, we are primarily planning to cover issues for wholesale firms. MiFID II is obviously important to a range of firms that provide services to retail customers too – the FCA’s Director of Policy, David Geale, will speak about retail matters in his address after lunch, but the majority of the conference and the breakout sessions will not cover those issues. We will, however, be providing plenty of future opportunities for firms and consumers to discuss retail issues through other channels and fora.
And fourth, we know the changes that this legislation will bring are likely to be significant – overall we believe they are very positive, improving market integrity, enhancing competition and providing further necessary protection for consumers and market users. Some of you may have different views. But today is not the day to get into revisiting the policy choices that have already been made or to debate the possible impact of the changes on the market. Interesting though that would be, we have a different agenda today.
With that said, let me move on to talk about the timing of things and what comes next.
The key date we are all focused on, as you’ll know, is 3 January 2017 – the date written into legislation for when obligations take effect. Six months prior to that - so 3 July next year - the UK (and other member states) must have turned those parts of the legislation expressed in directives into national law or rules. All the planning we and ESMA have done has worked back from these two dates.
From here, I’m going to need to need to take the timelines in two parts, as the dates vary for the technical standards, and the Delegated Acts.
For the RTSs and ITSs, just three weeks ago, after a lot of hard work by the ESMA standing committees and task forces, a set of proposals was agreed by ESMA Board of Supervisors, and the draft technical standards were published shortly thereafter on the ESMA website.
This was a significant milestone, although by no means the end of the journey.
The next step was that the draft technical standards were immediately sent to the Commission for endorsement, and they can take up to three months to give this endorsement.
After that the standards are subject to scrutiny by the European Parliament and Council, a process that can in theory last several more months. If the Commission, Council and Parliament don’t want to make any changes, the technical standards could be finalised in the first quarter of 2016.
Ultimately, we’ll have to wait and see if all goes smoothly – we have no reason to think it won’t.
Delegated Act timetable
For the Delegated Acts, the Commission has been carefully considering ESMA’s advice submitted last December, but has not yet reached a position where it has been able to finalise and publish the delegated acts. While these were expected to be published over the summer, November or December now looks much more likely.
The Council and Parliament likewise have a period in which they may object to the delegated acts, if they choose. This is, as standard, up to three months, although extendable by a further three months if required. Or they could choose to signal their non-objection earlier. This is all a further unknown.
So, those are the technical standards and Delegated Acts. Let me also speak here about the timing for our domestic implementation of rules.
Some elements of MiFID II, whether at the level 1 or level 2, where not contained in directly applicable regulations, will need to be transposed into national law – legislation from the UK Parliament or FCA rules for the Handbook.
In March, we issued a discussion paper to help us develop our approach to implementing the MiFID II conduct of business and organisational requirements. HM Treasury also consulted in the same month on some options for transposition of the EU texts into UK Acts of Parliament.
But to consult on real options, both our and HMT’s work is heavily dependent on seeing the near final EU rules – meaning the FCA’s current expectation is to publish a first consultation paper this December. But we have to remain realistic, giving sufficient time and consideration to our own proposals, before consulting. On that basis, we have decided to split our consultation efforts, with one CP in December and at least one more in early 2016.
I’m aware this is not a simple timetable – for those not familiar…welcome to the European process! If you want more details, we have included a diagrammatic timeline in your delegate packs and of course are open to hearing questions later in the day.
Lastly here, to note our expectations around authorisations:
- The new legislation will require certain firms such as OTFs, firms undertaking speculative trading in commodity derivatives and firms utilising high-frequency trading methods to be registered for their status or activities for the first time. For some, this will mean applying to the FCA for new permissions, but others will have to go through our authorisation process afresh.
- It is our current intention to start making new application forms available in early 2016 and start accepting draft applications from April. For those that this impacts, please continue to look out for details on our website. We’ll be seeking to give more details in relevant breakout sessions during the course of the day.
The risk of delay
We are all too aware that the later it is we consult on, and finally publish, final rules, the less time it is for you the industry to prepare and implement. Be assured, we are treading the line between getting things right and moving quickly, carefully.
What I’ve just set out is driven by the ultimate deadline of January 2017. This is universally recognised as challenging. For everyone. Regulators included.
But let me at this point just address an the key big picture issue – the risk of delay in the European legislative timetable I’ve just discussed.
What I've just set out is driven by the ultimate deadline – of January 2017. This is universally recognised as challenging. For everyone. Regulators included.
Let's be clear, even now that ESMA has delivered the draft technical standards, it will be for the Commission and co-legislators to make decisions about the European timetable, not for national competent authorities. I’m afraid the questions of ‘will there be a delay’ and ‘is a delay necessary’ are not ones me or my colleagues can or will answer today.
Okay, so that’s the timetable as it looks today. 'Not long to go', is the message we want to convey to you. You should already be at least in the early stages of planning, if not further down the track, having considered what the new rules, as far as known, could mean for your firms and their various business lines.
We hope that events like today’s are helpful for giving you more detail on these topics and to help you prepare. This is just one of several pieces of engagement we have done to date, and we’ve plans for much more.
To give you a flavour of our other planned forms of engagement, we’ll be:
- First, keeping firms and their advisors up to date with regular postings on our website. This has included background pieces, links to important documents and recent news – one to keep checking. The FCA will be seeking to make the best use of this resource in future, given that it is the easiest way for us to reach large numbers of firms at once.
- Second, adding content and signposting to other material in regular FCA publications like the Regulation Round Up and the MarketWatch newsletter. Again, another great way to communicate with large numbers of firms.
- Third, speaking at other conferences and events to get our messages out and to respond to questions.
- Fourth, importantly, we will continue with the in-depth discussions we’ve had with trade association representatives about the issues that matter to different industry sectors. In the interest of being transparent, the notes from each of these meetings are being included on our website.
Other ideas, from webinars, online videos and face-to-face workshops, are also being considered, and we’d welcome feedback on how best to help you and how to communicate with firms like yours.
As well as the consultation exercise I mentioned a few moments ago, we also recently sent out a cost benefit questionnaire to around 5,000 firms. This is a very direct form of engagement we are using to ensure we reach sensible, proportionate outcomes, on matters within our discretion. If you were one of those firms who received this, let me just say thank you in advance for your answers, which we hope to receive by the end of this week (23 October). Your input is very valuable, and is particularly appreciated at a time when you are already busy with your MiFID II projects.
Significant changes since CPs
The rest of the day is a chance to delve into the details. But let me now just touch on two topics arising from the recently published technical standards, where they’ve either changed significantly from the previous consultation version or where we’ve had the most questions.
Bond market liquidity
Perhaps one of the most debated topics at ESMA was around how to calibrate when it is appropriate to have pre-trade transparency for bonds.
The challenge here was to find a balance between improving transparency to aid price discovery, while equally ensuring that we don’t kill off market liquidity with too much transparency. A difficult balance to achieve. The level 1 text asked ESMA to come up with a methodology for deciding which bonds were liquid and which weren’t – and in last year’s Discussion Paper two approaches were considered:
- an Instrument-by-Instrument approach (or IBIA)
- a Class of Financial Instrument approach (or COFIA)
IBIA or COFIA – industry was heavily divided on the merits and shortfalls of both approaches. Equally, member states views have varied on which is best.
However, following extensive evidence gathering and consultation, ESMA concluded that the IBIA approach, with an element of COFIA for bonds new to trading, was the way to go. This was the approach that allowed ESMA to ensure that the bonds marked as 'liquid' were in fact liquid and avoid unintended consequences.
Around 4% of bonds traded today will be captured by the full scope of the new requirements, or around 2,000 different bonds – a large number of which are sovereign bonds.
And another topic on which ESMA and national regulators have been heavily petitioned from all perspectives has been measures around the regulation of commodity derivatives.
First, ESMA was tasked with developing further details on the limits that would apply to the size of positions firms could hold in commodity derivative contracts. Clearly this is an important matter for financial firms and non-financial firms alike. The purpose being to ensure that dominant positions do not affect the orderly trading and settlement of contracts in these markets.
In the draft technical standards last year, it was proposed that competent authorities could set limits for different commodity derivatives, such that firms could only hold a position up to a limit, which could be set between 10% and 40% of deliverable supply of the commodity. After feedback, the cap will now fall between 5% and 35% of deliverable supply or open interest, depending on the time to maturity of the contract. Naturally, for non-financial entities there are hedge exemptions to allow them to offset the risks from their commercial activities.
Second, while energy companies, agricultural businesses and food manufacturers who use commodity derivatives are currently exempt from financial regulation, ESMA was asked to set rules for when these firms’ speculative commodity trading was such that they required oversight from regulators.
If the amount of trading deemed ‘speculative’ meets a certain percentage of the trading in the relevant asset class in the EU markets, these firms will be required to be regulated and subject to MiFID rules, as well as capital and liquidity requirements. The aim was to strike a balance such that small companies or those only trading for commercial hedging purposes could remain exempt. Those who are major speculative traders, competing with investment banks and others, will face similar regulation to those institutions. Again, ESMA’s thinking has been informed by discussions with all sides within the sector, and its current proposals are more nuanced in recognising the different characteristics within our commodity markets.
We’ll be talking more about what this means in our commodities breakout session.
Key messages and conclusion
Those are just two areas worthy of note, but I’m sure everyone here will have several other topics they’ll be particularly interested to know more about. Hopefully, we’ve catered for everyone and have breakout sessions to address all of your interests during today’s conference.
This is important legislation with the potential to change markets significantly, for the better.
So, finally, to conclude on three key messages:
- First, it goes without saying that this is important legislation with the potential to change markets significantly, for the better. To help realise this in their implementation firms must appreciate the spirit and intent of the legislation and not just the letter; this relies on you reading, understanding and applying the requirements in your own firms and in your activities.
- Second, the scale of the change is huge, and firms should already be preparing for January 2017, based on the best available knowledge we have today. Please ensure this topic remains on senior management radars, and is getting the support it requires.
- Third, the FCA is here to help you. Not just at events like today, or via some of the mass-market engagement we’ve got planned. Our Supervisors and Contact Centre staff are being trained, and will be ready to answer questions once the legislation is finalised – please use them as needed while advancing your plans.
The pressure is on, but the path ahead is becoming clearer – we hope today’s conference helps us all in our collaborative endeavours.