Global Investor has spoken to a group of regulatory experts who have outlined their areas for concern and subjects where regulatory guidance is still outstanding or lacking. These ‘known unknowns’ of Mifid II include reporting guidelines, position limits for commodity derivatives, the treatment of firms from countries outside of the European Union and direct electronic access. The first part of this two-part series will focus on the missing links in reporting and transparency requirements and position limits. 

Reporting requirements

For the better part of a year, since the first regulatory technical standards were released, the reporting requirements under Mifid II and Mifir have been consistently singled out as one of the more challenging aspects of Mifid II. The amount of data firms will have to gather from January 3 onward is estimated to be around tenfold of the information gathered under Mifid I. 

Nevertheless, regulatory experts have pointed out that there is still a lack of clarity over the requirements. Identifying which instrument are reportable under Mifid II may prove challenging because of increased complexity and the absence of a so-called ‘golden source.’ The European Securities and Markets Authority (Esma) will publish reference data, but regulation professionals have questioned this approach. 

“I see some challenges to ensure appropriate testing and reporting under the new regime resulting from reference data issues and in particular the security data to be published by Esma. It is likely that the publication of a more comprehensive dataset will only be forthcoming close to the January 3 implementation deadline,” said Adrian Gill, regulatory compliance specialist at NEX Regulatory Reporting.

Aside from the challenges that this short time frame poses, Gill also said that there are questions about the data to be issued by the regulator.

“There are also real concerns around the quality of the data and whether complete coverage will be achieved. This presents real challenges for firms both in the testing and live reporting environments to effectively determine what they need to do to report effectively,” Gill added.

The Financial Conduct Authority is understood to be taking a softer stance on over-reporting on January 3 next year, after it said in July last year that it would not tolerate over-reporting once Mifid II comes into place.

“It is in the more obscure over-the-counter (OTC) derivatives where you’re likely to see greater tolerance from the regulator than in the more vanilla instruments where there is a well-established reporting regime. I think there will also be more tolerance for the firms who are new to the obligation and are still familiarising themselves with the regime,” Gill concluded.

Position limits

In early August, the European regulator set out the first position limits for Mifid II for rapeseed, corn and milling wheat contracts. As yet, it is not known how many types of products will be covered by the rules, but the scope of the limits include all commodity derivatives traded on a trading venue, which include regulated markets, multilateral and organised trading facilities, as well as ‘economically equivalent’ over-the-counter commodity derivatives, except emission allowances.

“We know there will be position limits on certain contracts, but we do not know what they will be. At the moment, I imagine there are persons who hold positions over 50% of open interest in certain niche contracts and can’t get a hedging exemption. That position could be way above the applicable position limits,” Conor Foley, advisor for government and regulatory affairs at law firm Norton Rose Fullbright, told Global Investor Group.

The UK’s Financial Conduct Authority has identified 78 contracts traded on UK trading venues that will be subject to the position limits. National regulators are required to set position limits for commodity derivatives, but can set the limit lower than the baseline proposed by Esma.

“Say the European regulator sets a baseline of 25%, the advisor would have to get rid of half of his position by the end of the year and firesales are possible. The FCA is also not obliged to apply the baseline.” Foley explained.

The biggest challenge is time

The Mifid II implementation deadline is a little over three months away, and the regulation will change operations in the front, middle and back office, with preparations estimated to cost firms a total of £2.1 billion over the course of this year, according to a survey by Markit.

“The biggest challenge is the timing of implementation, with so many of the requirements outlined fairly late in the process," said Anne Plested, Mifid II programme manager at Fidessa.  

With these and other unknowns, financial services firms will be forced to make judgement calls to ensure compliance, a regulation specialist told Global Investor Group in August. Experts have advised firms to keep track of the reasoning behind their compliance decisions to their ‘best efforts’ to their local regulators in case their interpretation of the guidance turns out less than correct.