The European Commission has sent contentious parts of the review of Europe’s trading rulebook back to the regulator that wrote them, saying that they do not sufficiently take the views of the European Parliament into account.
The technical standards in question form part of the review of the Markets in Financial Instruments Directive, known as Mifid II, and its accompanying regulations. They focus on transparency requirements for bonds and some derivatives, exemptions from Mifid II for market activities that are undertaken by non-financial businesses, and the limits placed on positions that can be taken in commodity instruments.
The bond transparency rules have proved particularly controversial. Banks, brokers and asset managers want Esma to reduce disclosure around the price and size of bond orders, fearing the current proposals would make it difficult to trade in a market already suffering from a lack of liquidity.
The European Parliament, through its influential Economic and Monetary Affairs Committee, has long complained that the draft standards do not take into account their own views. The main complaint is that the rules fail to allow for current market practices and no longer represent the original intent of the lawmakers when they first finalised Mifid II in so-called level one procedures.
This has been a perennial topic of scrutiny in Parliament involving the EC and the European Securities and Markets Authority, Europe’s top markets regulator.
Esma will now be forced to rewrite the rules, which have also prompted a ferocious lobbying effort from industry groups.
As with bonds, over-the-counter derivatives also have transparency requirements under the new rules.
There are also concerns that the position limits for commodity derivatives, which place restrictions on how much trading in a specific commodity can be undertaken by one firm, are not calibrated properly.
Likewise, Members of the European Parliament fear that non-financial firms could be caught by Mifid rules when they seek to use financial markets to hedge aspects of their business such as their payroll through foreign exchange futures and other derivatives.
Vanessa Mock, a spokeswoman for the EC, said that while it intends to endorse the “majority” of the standards written by Esma, these three in particular require “fine-tuning”.
She added: “That is why we have written to Esma informing them that, in the case of three of the 28 standards they have sent us, we intend only to endorse them provided that certain changes are made.”
An Esma spokesman said: “We have received communication from the Commission on the topics as outlined, and we’re studying the contents and deciding on the way forward.”
The news was greeted warmly by Markus Ferber, vice chair of Econ and the rapporteur for Mifid II. In a statement, the MEP said: “The latest drafts were just not up to standard and would not have solved the problem at all. The Commission is right to be afraid of the technical standards being rejected by the European Parliament – hence, further work is necessary.
“I expect Esma to revisit those technical standards swiftly, thoroughly and to adapt them in line with the European Parliament’s remarks. However, the redrafting must not lead to further delaying the overall Mifid II timeline.”
Mifid II was originally due to come into force on January 3, 2017, however the EC, the European Parliament and the European Council have agreed to extend this by one year to January 3, 2018. An amendment to the level one text to enact this is currently passing through the European legislative process.
Any further delay to critical parts of the rules will raise questions about whether a 2018 start date is practical.
James Hughes, a director at lobbyist firm Cicero Group, said: “Esma and the Commission proposal for the delay both state that the 2018 delay works if there is legal certainty on the text by June 2016. For these three [regulatory technical standards], this will be missed. Rather than amend the overall start date of 2018, we could see some kind of phased implementation for these particular RTS, which would give regulators and industry enough time to prepare the necessary systems.”