FIA’s Head of Europe Bruce Savage gave remarks recently on FIA’s European engagement, cross border challenges and MiFID II finetuning at the QED event in Brussels. This represents Mr. Savage’s first formal remarks as FIA’s Head of Europe.
Good afternoon. My name is Bruce Savage and I am Head of FIA in Europe.
I thank Adam Lindmark and QED for providing me with the opportunity to present FIA’s views on the current status and upcoming challenges for European Financial Markets Infrastructure.
Today I will focus on two main issues:
1 – Current cross border challenges and the potential implications for EU27 firms and capital markets infrastructure in Europe due to loss of equivalence and the resulting fragmentation of market access
2 – The opportunities to strengthen the EU’s Capital Markets Union and infrastructure through the recalibration, or finetuning, of MiFID II
FIA is the global trade association for the listed and cleared derivatives industry with offices in Brussels, London, Washington and Singapore
FIA’s members include clearing firms, exchanges, clearing houses, trading firms, and commodities specialists, as well as technology vendors, lawyers, and other professionals serving the industry from more than 48 countries.
FIA’s mission is to support open, transparent and competitive markets, protect and enhance the integrity of the financial system and promote high standards of professional conduct
As the principal members of derivatives clearing houses worldwide, FIA’s clearing members play a critical role in the reduction of systemic risk in global financial markets and the provision of stable and efficient financial market infrastructure in Europe.
I will start with my first point on cross border challenges.
If the UK leaves the EU without a deal, there will undoubtedly be serious consequences to market access for trading and clearing, due to the potential loss of equivalence for CCPs and trading venues. A loss of access to UK trading venues and CCPs would increase financial stability risks and potentially hinder the economic growth of capital markets in the EU.
In this outcome:
- EU buy side and sell side firms would lose access to deep pools of liquidity on UK domiciled CCPs, leading to competitive distortions that would negatively impact EU 27 firms
- In some cases, there are no alternatives to access certain Exchange Traded Derivatives contracts, which will have serious implications for hedging and risk management
- EU investors will not be able to access liquidity in EU shares listed on UK venues subject to the Share Trading Obligation with implications for best execution and costs for EU investors
- EU firms will not be able to trade derivatives on UK trading venues to meet the Derivatives Trading Obligation and would be forced to access smaller liquidity pools in the EU and other jurisdictions that will result in higher costs
EU27 brokers and clearers are integral to the strength and development of capital markets infrastructure in the EU, and an important component in the risk management process in financial services.
Derivatives clearing is a relatively high cost, low margin business and when you consider the implications of increased capital and higher margin and other costs with the potential loss of access to markets and clients it could restrict clearing capacity for EU27 providers globally.
A loss, or lack of, equivalence could also have an impact on the development and growth of EU financial markets due to the restriction in liquidity from third countries, including the UK. Brexit could result in UK firms losing access to trade for their own account or to make markets on EU venues.
Further, since the implementation of MiFID II in January 2018 there is still no equivalence determination for investment firms in third country jurisdictions, which impacts direct electronic access and trading access restrictions to EU venues.
As everyone is aware, the EC issued a 12-month temporary equivalence determination for UK CCPs to avoid cliff edge disruption that would have adverse consequences to financial stability.
In the absence of further clarity and legal certainty, FIA Members are concerned that UK CCPs may deem it necessary and are obliged to issue termination notices to their EEA members before the end of 2019 to comply with three-month notice periods included in CCP rule books.
FIA has called for the European Commission to extend the current temporary regime by a long enough period to allow equivalence for UK CCPs to be determined via the EMIR 2.2 regime for third country CCPs.
This would provide certainty to market participants and avoid financial stability consequences and negative consequences to financial market infrastructure in the EU.
The focus should be on EMIR 2.2 implementation, which provides a permanent solution to these cross-border issues based on supervisory and regulatory cooperation.
FIA, with AFME and ISDA, submitted a response to ESMA’s Level 2 consultation papers on tiering and comparable compliance and made several key recommendations to assess the systemic importance of third country CCPs with a clear nexus to the EU and an outcomes-based approach.
Moving on to my second point, the implementation of MiFID II has been one of the most ambitious exercises carried out by the industry in recent years.
FIA members and the Industry have been operating under MiFID II for nearly two years now, and we support a re-calibration that would simplify the rules to increase efficiency and reduce complexity and costs. This will support the growth of financial markets infrastructure in Europe, while avoiding a complete re-write of MiFID.
There are three key areas for review and re-calibration: transaction reporting, position limits and market data
First, transaction reporting
FIA strongly believes that a more harmonised and holistic approach to reporting across regimes is needed. Different reporting regimes are overlapping and sometimes inconsistent, for example, MiFID II, SSR, SFTR, and REMIT. A harmonisation would avoid duplication and improve efficiencies in financial market infrastructure. This will benefit market participants and regulators alike. We support the findings of the German Ministry of Finance following its public consultation on MIFID II.
FIA has advocated for changes to improve reporting in our position paper earlier this year including:
- Report once or permission access so that regulators have access to a single dataset
- Harmonise UTI, UPI and common data elements across jurisdictions globally
- Introduce single sided reporting of derivatives transactions in the EU like the US & Canada
MiFID II reporting is also driven by reference data. For reporting to be consistent and accurate across all submitting parties, reference data must be consistent and equally available to all market participants.
There is currently a lack of a single golden source of reference data, which increases the risk of inconsistent reporting.
Secondly, market data fees
Market data is highly valuable and supports the efficiency of a trading eco-system, which helps firms and investors to make investment and hedging decisions and facilitates transparency in the market.
FIA clearing members have observed the rising cost of market data in the EU over recent years. MiFID II and MiFIR have increased the need for companies to use market data in real time to satisfy specific regulatory requirements, such as real time risk management and monitoring of best execution.
FIA clearing members responded to the recent ESMA consultation paper on the development in prices for pre- and post-trade data.
We believe that the cost of market data needs to be transparent to end users, that trading venues should not charge for essential market data, that market data should be charged on a reasonable commercial basis and there should be consistency across venues in the level of detail, format and structure of how fees are presented.
Finally, FIA Members welcome the proposals made by ESMA in their call for evidence in March 2019 to move from the currently all-encompassing position limits regime covering thousands of commodity contracts to focus on a number of key benchmark contracts.
In the coming months, FIA will continue to work with regulators and legislators on simplifying the regime to allow new and illiquid contracts to grow in line with the needs of the market.
Thank you again to QED for the opportunity to present some of FIA’s key concerns on the current status and upcoming challenges for European Financial Markets Infrastructure.
I look forward to answering your questions as part of the panel session.