Banks struggling to come to terms with current regulations face an even tougher future with a potentially “draconian” Markets in Financial Instruments Directive (Mifid) II on the horizon, according to Rule Financial’s Jeremy Taylor.

The upcoming Mifid II technical standards could lead to banks pulling out of the OTC derivatives market, said Taylor, who is a specialist in derivatives and operational processing at the consultancy.

He made the comments following the Royal Bank of Scotland’s decision to scale back on its OTC derivative activity, citing regulatory costs as a factor.

“There is a concern that this will result in a draconian Mifid II that will stifle growth in the banking sector.”

“There is a genuine danger that this could place further pressure on the OTC derivative markets in Europe for participants already operating under extreme balance-sheet pressure, low margins and reduced demand from customers for products to hedge risk.

Taylor pointed out that Mifid II has become embroiled in the heat of the forthcoming European parliamentary elections as "it is seen as an opportunity for candidates with an anti-banking agenda to increase support for their election chances."

“Banks have already invested millions in preparation for Emir, if the regulators move the goalposts once more, they might have to pull the plug on derivative desks that are too expensive to operate,” he added.

The European Securities and Markets Authority (Esma) is expected to consult on the technical standards of Mifid II in Q2 2014.