MiFID 2 Timestamps

Time is yet another example of how MiFID 2’s range makes a simple concept fiendishly complicated.  Activities like high frequency trading (HFT) measure time in micro seconds and smaller intervals whilst a structured transaction that’s taken six months to negotiate often appears to be executed over several days as the final terms are specified.  The new rules attempt to cover both of these extremes and also define what is the benchmark for time, it’s UTC and where can you find it.

MiFID 2 sets higher standards for HFT venues and traders whilst still setting a minimum precision of a second for more traditional dealing methods.  One second may sound fairly easy to match but remember every few years the physicists decide to add a second to UTC (usually at year end) to keep this measure in time with the way the Earth and the Solar System currently operate.  This gives system architects a headache.  Every computer ships with an on-board clock chip running the mother board.  But I’ve never heard of one of these clocks being set up for leap seconds so software clocks over the network might be better, but then how fast is your network, if the server is in Europe and the trader is in Tokyo what time is it actually telling?   Lots of practical issues for the very large firms with global operations affected by MiFID 2.  Here’s a quick summary of the MiFID 2 rules.

EU Updates Financial Reporting Templates for IFRS9

This isn’t earth shattering, the main provisions of IFRS 9 are coming into force in January 2018 and naturally there will be changes to the format of published financial statements.  The EU uses this as the basis for statutory returns that firms must make under CRR.  The original delegated regulation for this is 2014/680 and parts of this are now being updated by 2017/1443.  But the size of these technical rules is illustrative of the costs of regulation.  2014/680 is 1,861 pages long with hundreds of reporting items defined and referenced for inclusion in an electronic submission framework.  The update is a mere 527 pages and all firms will need to update their reporting to comply for the first reports which will be for Q1 2018.  That said once the update is complete the compliance should be fairly automatic for a firm that already has its IFRS lines produced at a detailed level.

On this subject there are firms that email MIS spreadsheets daily to their regulators which is considerably more primitive and time-consuming for both sides.  If the EU was serious about promoting efficiency it ought to put a time bar on how long these solutions should permitted before electronic submission is required.  Or perhaps make it part of a scorecard which leads to a capital add-on reflecting the higher risks a firm carries when it tolerates weak reporting infrastructure.

 

The FRTB will tighten Desk Management Standards, Trading/Banking book Position Transfers and Banking Book hedging

As well as upgrading the market risk capital rules the FRTB will set much higher standards over the governance, management and operation of trading desks.  Desks must be defined in detail with traders assigned to a single desk which must have a designated desk head.  As previously covered the FRTB is prescriptive about what instruments and activities should be part of the trading book and what should not.  Further moving positions from trading book to banking book will be much harder, banks need to document the reason, receive senior management and regulatory approval and then publish the fact and adjust their capital calculations  to prevent any capital benefit.

Using the trading book to hedge banking book risks will still be possible but different risks require different approaches;
1) Equity and Credit risk need an external trade that exactly matches the internal risk transfer trade.
2) Interest rate risk needs the internal risk transfer trade to be dealt by a specific desk set up for that process, this desk can then trade hedges with third parties.
3) FX and Commodity risk will only require an internal risk transfer to a standard trading desk.

Trading book risks cannot be moved to the banking book for regulatory capital purposes.

The EU published a proposal to amend the existing CRR rules to meet the new BCBS standard in November 2016.  Here is an analysis of the governance, position transfer and risk transfer provisions, comparing the existing EU rules with the BCBS standard and EU’s proposal.  As one would expect the proposal follows the BCBS standard very closely and at this stage the EU does not seem to be intending to “gold plate” or add any extra rules.

 

MiFID2 Pre and Post Trade Transparency

The upgrade to the trading transparency regime is one of the largest components of MiFID2.  MiFID1 was very equity focused while MiFID2 has a vast scope across financial markets.  The regime focuses on three areas;

  1. Pre-Trade – When should orders be public?
  2. Pre-Trade – When should quotes and expressions of interest be public?
  3. Post-Trade – When should executed trade details be made public?

Financial instruments are divided into asset classes, sub asset classes and sub classes and their liquidity assessed.  Asset classes include bonds, interest rate derivatives while the sub classes cover areas like the maturity and underlyings of derivatives.  The liquidity assessment uses several methods and some of the levels are initially more relaxed being tightened over the next few years.

More liquid products (like equity shares) will be required to make more activity public while illiquid products will have waivers to allow participants to disclose less pre trade information and to defer publication of trades executed.  Generally, the rules are split between those for equity like instruments (shares, depositary receipts, ETFs, certificates) and non-equity-like (bonds, structured finance products, emission  allowances and derivatives).  Equity publication may be deferred one or two hours or until the end of day while non-equity-like publication may be deferred for two business days.  There are also provisions for regulators to effectively suspend the whole non-equity regime for months where a liquidity crisis occurs (MiFID2 is peppered with special rules covering government debt markets).

The detailed analysis can be found here.  These rules should also be viewed with the new requirements over the provision of best execution and the evidence that investment firms will need to keep to prove their compliance.

EU adds EONIA to its Critical Benchmarks List

The EU published Regulation 2017/1147 last week amending 2016/1368 to add EONIA to EURIBOR on its list of critical benchmarks.  Both are published by EMMI in Brussels and should be viewed in the context of efforts to control and move all EUR activity to inside the EU.  Supervising benchmarks is a natural part of the new world regulatory order but I do wonder just how territorial this needs to be when one considers the vast amount of USD activity traded and cleared outside the US with little obvious harm done to the US by this.

Final MiFID2 Implementing Technical Standards published in Lex

The last two of the eight implementing technical standards for MiFID2 have been published in Lex bringing them into EU Law.  They are 2017/1110 which covers templates for the authorisation of Data Reporting Services and 2017/1111 which covers the reporting to ESMA of sanctions (both criminal and administrative) and measures as well as an annual report on this and investigations undertaken.  The full list is here.  There are now only six of the eight standards covering authorisation, passporting and acquisitions left to complete.

Three More MiFID2 sub regulations finalised in Lex

Three more minor regulations have been published in Lex in the last few days;
2017/1005 on the format for communication that a financial instrument and its derivatives have been suspended or removed from a trading venue.
2017/1018 on the format for communication that an investment firm will be providing financial services in another EU state.
2017/ 1093 on the format for the daily and weekly reports that trading venues and investment firms must provide on commodity derivative, emission allowances and their derivatives positions and activity.
All are  included in my regulations guide here

MiFID2 Progresses on the final subsidiary rules

Very roughly there are about ten more rules still to be published in Lex to bring MiFID2 to conclusion from an EU legal perspective and another one, 2017/081 was published a few days ago.  It covers the rules for templates which will assist regulatory cooperation in the authorisation of investment firms.  I’ve included it in the regulatory analysis and will try to clarify the status of the remaining rules and the details of the Q

MiFID2 Updates

A lot of site updates relating to MiFID2 added, a consolidated list of all the defined terms in the regulations and delegated regulations here.
Diagrams showing the product and market scope of the regulations as well as the thresholds that Systematic Internalisers need to meet.  Finally an analysis of the Third Country Financial Institutions which will lead to further consideration of access into the EU for third countries, particularly as the UK will be joining them in a few years.