MiFID II delay: a fait accompli or a long and windy road?
Whilst Steven Maijoor’s comments were met with strong criticism by Members of the European Parliament, the Commission formally announced on the same day its preliminary view that it shared ESMA’s concerns with Martin Merlin, the Commission’s director of financial services, suggesting that the “simplest and most legally sound approach would be to delay the whole package by one year”. Commentators from parts of the financial press, it seemed, went even further and reported about the proposed delay as if it already was a “fait accompli”.
This, however, is not the case and it would be rather premature to assume that a blanket delay will be agreed. So far the Commission has proposed further discussions with the European Parliament and the Council about a possible delay and as MiFID II does not provide for a phased-in approach or a delay to implementation, it will be for the co-legislators to decide on a suitable approach. Possible solutions might indeed include a delay of all of MiFID II and the implementing regulation by one year although this is likely to be strongly opposed by the European Parliament who considers that there are risks associated with postponement and giving the industry and regulators more breathing space. There is of course the possibility to delay MiFID II by only a few months in order to keep pressure on the industry and to avoid losing momentum of implementation efforts; however, this might be the least satisfying solution if it turns out that time gained is not enough to secure the desired outcome of a smooth transition to the new regime.
In his speech last week Steven Maijoor focussed on delaying certain parts of MiFID II relating primarily to transparency, transaction and position reporting. In the meantime ESMA has published further details on how it considers such delay could be achieved in practice. These details came in form of a note which ESMA had prepared and submitted to the Commission on 2 October together with its letter in which ESMA formally raised concerns about implementation deadlines and requests an opportunity to discuss these considerations and possible solutions with the relevant Commission representatives.
The note looks at (i) the reasons for possible delays in the expected real applicability of certain MiFID II provisions (especially those related to the development of IT systems), (ii) the reasons why those delays are hard to eliminate or manage and (iii) the possible solutions on how to tackle them. ESMA proposes three solutions:
- A Level 1 fix: this would involve postponing the application date of some Directive articles by a few months. ESMA who has expressed a strong preference for this solution considers that the approach provides the best option in terms of legal certainty and synchronicity, and it would avoid the difficulties associated with a “legal vacuum” which would otherwise arise when MiFID I was legally repealed whilst certain aspects of the new MiFID II regime would not yet be in force. On the downside, ESMA acknowledges that this approach lacks flexibility to the extent that it affects the relevant Level 1 provisions without the ability to adjust certain aspects of the Level 2 text.
- A Level 2 fix: this would involve postponing the application date of certain Level 2 measures and ESMA suggests that this could be done in one out of two ways – either by establishing a fixed date (e.g. 3 January 2018) or by establishing a relative date (e.g. x days after publication of an ESMA opinion). Whilst the former solution provides greater planning certainty, the latter would minimise any implementation delay to a minimum.
- A Level 3 fix: this would involve all national competent authorities agreeing an implementation date that would be later than the one contained in the RTS/ITS. Although this approach provides the most flexibility, it provides no legal certainty and is hugely dependent on Member State co-operation and is likely to lead to divergent implementation.
Whilst ESMA’s note goes some way towards identifying a solution, it does not provide a view on the practicalities of delaying implementation for certain parts of MiFID II only. Indeed, ESMA refers to various interdependencies (e.g. between reference data and post-trade information) but it remains unclear how delaying certain parts of MiFID II would fit in and work in a wider MiFID context given the level of interaction between those and other parts of the MiFID II legislation (e.g. pre-trade transparency, trading obligation and best execution) and between MiFID II and other directives/regulation (e.g. on market abuse). For example, there is a question mark as to whether national competent authorities can afford (and if there is a political willingness) to delay transaction reporting under MiFID II when the data to be reported under the new regime constitutes core data for market abuse surveillance purposes.
Potential MiFID II delay: affords more time to iron out uncertainties?
More importantly and although the proposed “fixes” only envisage a delay in application dates, discussions between the Commission, Parliament, the Council and ESMA will almost inevitably touch on whether or not any implementation delay should be used to iron out uncertainties in the Level 1 text (e.g. with regard to package transactions). Although there will be very little to no appetite to open up Level 1 discussions, the co-legislators may find it difficult to withstand ongoing lobbying efforts where there seems to be a clear consensus that the Level 1 text would benefit from amendments.
It also remains unclear what impact an implementation delay may have on the adoption of delegated acts and the final RTS and implementing technical standards (ITS). If an implementation delay is agreed, then Council might well veer towards rejecting or amending more RTS than it would otherwise do which, in turn, would increase review times and lead to further delay.
Therefore, as much as a delay (of all or parts) of MiFID II might be welcome by the industry, it is distracting and throws up complexities of its own in the medium term. It remains to be seen what clarity, if any, the proposed meeting between the co-legislators and ESMA will bring; however, regardless of whether a consensus to delay is reached or not, it will not reduce the implementation workload the industry is facing and it certainly won’t provide answers to existing areas of uncertainty.
Firms will be well advised not to get complacent and slow down or, worse, put their MiFID II projects on hold. They should use their time wisely and continue with implementation work in areas not subject to on-going controversy and change and on the basis of information already available.