Brexit to spark Mifid III, warns former MEP Swinburne

Get ready for Mifid III.

City companies have barely got to grips with a significant overhaul of Europe’s trading and investor protection framework, known as Mifid II, but the next iteration of the rules could now land sooner than most are expecting, courtesy of Brexit, said one of the architects of the revised Markets in Financial Instruments Directive.

Kay Swinburne, who was a Conservative MEP and vice-chair of the European Parliament’s Economic and Monetary Affairs Committee until June, said Brussels will probably overhaul parts of Mifid II following a public consultation, due to be published in the coming weeks.

Swinburne, who joined auditor KPMG in July as vice-chair of financial services, said: “This will be a Brexit-initiated rewriting of certain parts of Mifid II. They are refusing to call it Mifid III, because they think it will scare the horses.”

That prediction will spark concern among companies that have already spent vast sums of money aligning their EU operations with widespread changes implemented at the start of last year.

Brussels is obligated to carry out a review of Mifid II at the end of 2020, but Swinburne predicted it could come sooner, as the UK is scheduled to leave the EU on January 31.

“They have a legal requirement to do that [review Mifid II] by the end of next year, but I don’t think they will wait that long. This will be a Brexit initiated rewriting of certain parts of Mifid II,” she said.

She added: “You have those who want to see the fruition of the original objectives of transparency of Mifid II. There are others who say the UK was a big player in the Mifid II drafting and anything that was given as a concession to the UK should be removed.”

London-based investment banks and asset managers with operations elsewhere in the EU are unlikely to welcome any significant revisions to Mifid II, which only came into force in January 2018.

Neil Robson, financial services partner at Katten Muchin Rosenman, the law firm, said: “My clients would be massively frustrated.

“Mifid II was a big, time-consuming project to get all the changes in place. If we are talking more than just tweaks and it is Mifid III, that would not be well received.”

A senior public policy figure at a UK asset manager with a pan-European business, added: “Our view will always be that you need to apply existing rules and allow them to bed down before you rush to change them.”

Among the landmark changes introduced, Mifid II forced brokers to unbundle research from the cost of trading commissions for the first time.

Earlier this year, the German finance ministry produced a position paper seen by Financial News that called for a “thorough review” of the unbundling rules, pointing to market concerns that Mifid II has reduced the availability of research on smaller listed companies. The paper said any legislative changes should incentivise research providers to cover such companies.

Ross Mitchinson, co-chief executive of Numis, the stockbroker, said: “Getting ready for Mifid II was an administrative burden. We have to do a huge purge of our database to make sure everyone was paying for research, and that was a big effort cleaning it up. We also spent a lot of time changing our payments systems.”

In addition, Swinburne claimed that open access – a key part of Mifid II – could be removed as part of any overhaul. Open access would force futures exchanges to allow their derivatives contracts to be cleared at rival clearing houses, bringing them into line with the cash equity markets, but at the outset of Mifid II, regulators delayed the implementation of the rules until July 2020.

“It was a fundamental premise of Mifid II. If you are going to allow vertical silos to dominate – and encourage them – that is a complete change to the original intent of Mifid II. I think that is Mifid III,” she said.

Exchanges headquartered outside the UK, such as Germany’s Deutsche Börse and US-based Intercontinental Exchange — which operate two of the biggest futures exchanges in Europe — have argued for a review of open access.

People familiar with Deutsche Börse’s view said it is concerned that open access could lead to financial instability. Brexit could exacerbate such fears, because multiple regulatory regimes would become involved in Mifid II’s supervision. Deutsche Börse’s Eurex derivatives division would prefer a further delay and ultimately the termination of the idea.

German MEP Markus Ferber told Financial News he would support the removal of open access as part of a revision of Mifid II.

“We introduced it back in the day to specifically accommodate British demands. With the UK leaving and the trading and clearing landscape shifting quite considerably, we really have to think about the question whether or not the provisions agreed back in 2014 are still the best way forward,” Ferber said.

He added: “As we do not intend to repeal the whole framework and replace it with something new, I would rather not call it Mifid III, but in the end what matters is the content, not the semantics.”

Andy Ross, chief executive of CurveGlobal, a derivatives venture backed by the London Stock Exchange, said: “It should be a choice for the customer rather than for the exchange to lobby to maintain a monopoly.”

A spokeswoman for the European Commission said a public consultation on Mifid II is being prepared and will be launched in the coming weeks.

“After the four-week consultation period, we will consider possible changes, depending on the feedback received,” the spokeswoman said.

She added that Brussels expects to implement so-called delegated acts, which can be used to alter existing regulation, in the third quarter of 2020. The European Council and European Parliament are usually given three months to raise any objections.

Swinburne added: “Unfortunately, the global players who implemented Mifid II have spent a huge amount of money, effort and time understanding and putting all of that in place.”

Additional reporting by Paul Clarke

To contact the authors of this story with feedback or news, email David Ricketts and Samuel Agini

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