Giles Kenwright, head of regulatory advisory at Delta Capita, reacts to ESMA’s latest Q&A on Mifid II, as market participants face a race against the clock just over a year out from implementation.
Hot on the heels of the FCA’s consultation paper at the start of this month, ESMA Q&A guidance for Mifid II undoubtedly removes a good chunk of ambiguity. Until now, the previously released RTS documents, which outlined the conceptual framework for Mifid II, were often far too vague to allow business or technical solutions to be implemented.
Thankfully, these new guidelines provide much needed clarification with illustrative examples. Take the heatedly debated clock sync requirements. Previous RTS documents merely talked about the need for trading venues and their members/participants to synchronise business clocks used to record the date and time of any “reportable event”. There was just one thing missing – they didn’t define exactly what such an event may be. ESMA now highlights what they at least “consider” a reportable event to be. In simple terms, this is basically the time of events affecting an order and the time of the trade itself. It also helpfully provides examples of the reporting obligations of each counterpart in various scenarios.
That said, this guidance from ESMA should by no means be seen as the final word. As implementation progresses there will undoubtedly be areas requiring further clarification. Firms will need to define, and then evidence adherence to, their best execution policy. Was a trade executed in the best interests of the client in terms of price, transaction costs, speed and likelihood of execution? This becomes more challenging when you consider the current levels of market volatility as witnessed by the suspected mini flash crash last week which saw Sterling fall 6 per cent. Events affecting an order or trade will need to be recorded to the millionth of a second in most cases where computer logic is involved in the decision making process. Firms will undoubtedly find themselves needing to make assumptions in order to comply with the complex set of requirements.
It is worth noting that this latest paper from ESMA will be supplemented by related technical documents on reporting instructions, expected before the end of this month. Market participants should also be aware of possible changes could occur to the RTS document, which is still under review from the European Parliament and Council. Any potential objections from these two institutions could yet impact the guidelines published this week. The industry can ill afford to wait though, and firms currently developing new technologies and processes that not only meet, but go above and beyond the requirements, will be best placed as the clock ticks down to January 2018.