The European Venues and Intermediaries Association (EVIA), formerly known as the Wholesale Markets’ Brokers Association (WMBA), has published its response to a call from Germany’s Finance Ministry for feedback on MiFID II and MiFIR one year on from their implementation. In the feedback, EVIA makes a number of points and stresses its belief that foreign exchange swaps should not be covered under the regulation.
EVIA does note that whilst its feedback sets out some of the difficulties and remedies in response to the premise of the call for evidence, it states that MiFID2 delivered a “great many benefits to transparency and conduct, resulting in a market structure much better placed to implement the remarkable ongoing developments in technology”. It adds that the regulation has enabled harmonisation with third country regimes which co-host the wholesale markets.
“For the record, we would pick out the following benefits: standardisation of trading venue rulebooks and protocols; consistency of product identification, particularly OTC (although ISIN not ideal identifier); consistency of client identification (LEI); improved market monitoring and provision of risk information; improved governance and systematic issue resolution; and no noticeable liquidity disruption during implementation phase and first year set up,” the association says.
In the body of its feedback, EVIA says that as MiFIR trading venues, all its member firms have committed great quantities of resource over the last 36 months to implement MiFID2, however it says it wants to underscore that the complexity and uncertainty across its breadth and inter-linkages has made for “extremely challenging ‘business as usual’ maintenance of ongoing day- to-day operations, with any final operating model and implementation still evolving”.
It adds that its members note the increased appetite for trading on venues and would most welcome the simplification of data capture and onwards flows; a simpler application of the rule-book perimeters together with the coordination with related financial infrastructure regulations; and a harmonisation of approaches with third country regulations under which our firms all operate parallel and contemporaneous services. “Together, we integrate all our comments and requests as the adoption and implementation of global standards and we would understand that an equivalence regime based upon mutual recognition would form part of that,” EVIA says.
In general, it says that the most convoluted implementation topics have occurred where the MiFID perimeter captures non-investment products, specifically foreign exchange, commodities and repo. “Rather than create more complex and cross-referenced rules, we believe that these products should be removed from the scope of MiFID by a revision to the perimeter guidance,” it states. “The most complicated implementation projects have concerned the application of reference data to the listing of non-simple instruments, especially to derivatives and to contingent executions such as “packages”. In tandem with the responses from communities of market participants, our clients and customers, we urge a revised approach to instrument reference data and directly support the recommendations from ISDA and FIA in this regard.”
EVIA says it believes the most harmful outcome from the MiFID implementation so far has concerned the economic rents charged by market monopolies in the provision and bundling of required data sets and the restriction of access to mandated CCP clearing and CSD processing.
In terms of FX instruments, EVIA says that any trades with a maturity at or under 12 months should not be defined as financial instruments, but rather as payments and treated accordingly. “MiFIR should set out a simple and effective definition of a derivative as a sub-class of financial instruments which identifies the cash settlement to a contract by reference to a specified reference or calculation,” it says. “Forward agreements in general and most importantly FX forwards should not be treated as either financial instruments nor derivatives. This is in accord with global standards, notably that in the United States and that which broadly applied under MiFID I. “Instead the relevant regulations applying to forwards should apply, in the case of FX this may be as payments or as funding according to the intent, structure and counterparties to the contract,” it adds, noting that where they are classified as derivatives, the fact that FX markets are inherently global means they require a more harmonised coordination to global standards access than perhaps any other market segment.
EVIA also raises the issue of FX swaps when providing feedback on funding and collateral markets, noting that the recent request by an ESMA committee to reclassify FX swaps traded in the EU as a single instrument rather than two associated legs, observing that amongst other complications, this approach would result in the near leg of a swap usually expiring even before the trade was confirmed and reported whilst preventing the netting and consolidation of risk and payments.
The feedback also calls upon the authorities to simplify execution reports and revise the application of inappropriate retail rules such as ‘best execution’ to professional and eligible counterparties where choice and competition should be the pertinent controls.