The clock is ticking down and there are only about three weeks to go before the dreaded MiFID II regulatory structure is implemented on 3 January 2018. While it’s been difficult to judge the industry’s preparedness for the change, several aspects of the new regulations have attracted the most debate and concern. These have included transaction reporting, unbudling of research costs and whether institutional investors will absorb the costs or pass them on to their clients and trade identifiers. As the deadline nears, one of these issues – Legal Entity Identifiers (LEI) - has assumed more significance than the others.
The enforcement of LEI’s to identify legal entities is targeting increased market transparency via audit trails. Each market participant will need its own 20-character “alphanumeric code” and the relevant codes for buyers, sellers and issuers of the security will be required to complete a trade.
As we discussed yesterday in “UBS Is Using Ethereum Technology To Soften The Impact Of MiFID II”, a group of financial institutions, led by UBS, are building a compliance system based on the blockchain which manage LEI requirements. Briefly, reference data hashed to the Etheruem blockchain will mutualize the application of LEI’s for the buyer, seller and issuer in financial market transactions in real-time. While bankers are becoming increasingly upbeat on the capabilities of blockchain technology…
In a presentation obtained by CoinDesk, Christian Nolting, also the bank’s (UBS) global head of wealth, and Marcus Muller, global head of the CIO office, explained digital currencies and blockchain to their fellow bankers. In the presentation, the bankers asserted that the “opportunities associated with blockchain technologies are huge,” and could be fully put into practice within the next few years. And in what's possibly one of most grandiose predictions about blockchain's impact on the global economy, the bankers predicted that roughly 10% of the global gross domestic product (GDP) would be tracked or otherwise "regulated" by a blockchain by 2027.
…the new system is not going to rescue thousands of investors and corporate issuers who are unlikely to have their LEIs ready in time for the MiFID II deadline. For example, Thomson Reuters estimates that only about two thirds of the roughly 15,000 companies listed on European exchanges have an LEI.
If the regulators don’t budge, a large number of entities will be shut out of the markets. Something is going to have to give, quickly, as the Financial Times reports.
Banks are pushing for an eleventh-hour reprieve for a key part of new European markets rules because about a fifth of their clients do not have the vital tag they will need to continue trading. They are worried that some investors could be shut out of deals from the start of January because thousands of counterparties or corporate issuers will not have their unique trade identifiers.
In recent weeks the banks, which play a critical role in the market organising trades, have undertaken campaigns to raise awareness among customers before the arrival of the new Mifid II rules on January 3. At the same time they have been pressing for regulators to ease their hardline stance and are growing increasingly confident authorities are set to grant a grace period of several months.
Speaking to a senior executive at a large investment bank, the FT reports that “15 to 20 per cent” of his clients do not yet have LEIs and that is not expected to change much in the next three weeks. Executives at three other banks told the FT they were is a similar, or worse, situation while a fourth remarked that it would be a “s*** show” if his bank was forced to refuse to do business with clients without LEIs from January 3. Neil Robson, a lawyer at Katten Muchin Rosenman in London, told the newspaper that “Asian applications for LEIs are lagging way behind those from European entities and US entities.” If the banks are to win their reprieve, it could happen today, as the FT explains.
Market participants are hoping a meeting by the European Securities Markets Authority (Esma) on Thursday will give them breathing space, and a two-month grace period in which they can retrospectively report deals once the client has its LEI. Esma declined to comment. The UK’s Financial Conduct Authority (FCA), like Esma, has frequently told the industry it will take a tough “No LEI, no trade” stance for Mifid.
However, three people who have discussed the issue with the FCA say they detect signs of its position softening. “They (the FCA) are effectively saying they’re not in a position to take differing views (to Esma),” one banker said, adding that he hoped Thursday’s Esma meeting would yield a “pragmatic solution”.
MiFID II has been termed a “Big Bang” for financial markets. This author started working in financial markets, in equities, shortly after the last “Big Bang” in 1986. We remember a big-hitting salesman, who'd married into a family controlling a major retailing company, was sat next to another salesman who specialised in selling retailing equities to institutional investors (synergy). In turn, the specialist retail salesman sat next to the trader in retail equities whose wife was, coincidentally, a big trader in retail and other equities - we could monitor her trading account on the in-house system (transparency). Moving jobs to the pre-eminent investment bank in London some years later, the head of compliance would stand behind a market-maker and ask him why he had a particular position in a stock, while sucking in air through his teeth. That was the signal for the trader to flatten his book. It's sad that despite the tsunami of strangulating regulation ever since, abuses - e.g. rate rigging, money laundering, front running, etc, have only got bigger - while no senior management from the banks have been charged (except in Iceland). There is a link there, obviously, which the regulators choose to ignore. Consequently, MiFID or not, things aren't going to change.