One of the most controversial elements of Mifid II, the open access requirement for CCP’s and trading venues may not be implemented until 2020, as local regulators granted last minute extensions.
The implementation of Mifid II has suffered a setback on the day it was due to be implemented, as German and UK regulators confirmed at the last minute that clearing houses have been granted a 30-month extension to apply part of the new rules.
Being a directive, rather than a regulation, Mifid II leaves member states in charge with its implementation; member states retain a certain amount of leeway with regards to the implementation of rules. Moreover, article 54 of the Mifid II directive included a provision allowing trading venues to apply for traditional arrangements.
In Germany, local regulator Bafin confirmed that Eurex Clearing has been granted an extension with regards to the application of open access requirements to its derivatives market, it will now have until July 2020 to implement the requirements. As one of the biggest clearing houses in Europe, Eurex currently manages a collateral pool of €49bn in assets. As of December 2017, the notional value of all derivatives traded on Eurex was €10.255trn. At the same time, British regulator FCA confirmed that it has granted a similar extension to the commodities derivative markets ICE Futures and London Metal Exchange.
This delay hits one of the most controversial elements of Mifid II, the attempts to improve transparency and competition in the derivatives market through a so called “open access requirement”, offering investors a choice where to trade, clear and license their products, rather than tying them to one provider.
Open access advocates and opponents
One outspoken supporter of the open access requirement is London Stock Exchange (LSE). The organisation points out that Mifid I introduced similar rules to the European shares market in 2007. Praising “the power of competition”, LSE points out that “the result for customers and investors was transformational: lower trading prices, reduced spreads, faster and more resilient technology, and a fundamental rebalancing of the relationship between the providers of infrastructure and its users.”
However, LSE’s German counterpart Deutsche Boerse has raised criticism of the open access requirements. The group warned that open access could be could be: “forcing the interconnectedness of systemically important financial market infrastructures in derivatives” and, according to Deutsche Boerse, “could potentially pose threats to market integrity and stability, especially in distressed market conditions.” In other words, by encouraging a growing interconnectedness of derivatives markets, the very same regulation that was intended to make the financial sector more crisis prone could instead reinforce the impact of a potential crisis.
The disagreement between two of Europe’s major exchanges is further complicated by the increasingly imminent prospect of a British exit from the EU. Following the failed merger of Deutsche Boerse and LSE in March 2017, Deutsche Boerse now aims to capitalise on the Brexit effect. In October 2017, Eurex Clearing, which is owned by Deutsche Boerse Group has announced the launch of a new partnership programme, in a bid to capitalise on a potential move of the euro derivatives clearing market away from London.
Rebecca Healey, head of Market Structure at Liquidnet EMEA comments: “One of the key cornerstones of MIFID II is to ensure supervisory convergence across the Union, hence the rise of ESMA and its remit across European NCAs. Clearly Brexit was a factor in the implementation delay, but it will hamper the ability for market participants to do business across Europe, with 28 regimes and all the costs that this implies. MiFID or no MiFID, clearing houses still need to look at ways to lower costs for the end investor as well as reduce potential systemic risks. This will be even more relevant in the context of Brexit as a large number of transactions could potentially be cleared in the future outside of the EU (in London).”
With German Eurex delaying the implementation of Mifid II and British clearing houses facing the prospect of exiting the EU, is the risk of regulatory patchwork greater than ever.