The very late information on certain key technical provisions and issues for third country business and global capital markets made it impossible for many firms to be fully compliant on day one.
National regulators have been signalling their recognition of this for some months. Broadly speaking, there has not been major disruption in the capital markets, but incompleteness of data remains a significant issue and has caused a noticeable disruption in the distribution of some investment products.
Our overall impression is that firms active in the capital markets are relatively pleased with the first few days of MiFID II, allowing for some tolerance of expectation of hitches relating to internal data quality, and any priorities and deferrals in firms' or industry plans. But that broad statement masks a number of underlying issues, some of which are mentioned below. And in the retail market, there has been disruption to the distribution of a number of investment products due to incomplete product data.
Many countries still have not transposed MiFID II, and some of those that have fully brought into effect all the requirements had (initial) data receipt and processing issues. Also, the difficulties that key exchanges would have encountered in meeting the open clearing obligations were resolved only by national regulators (initially BaFin and the FCA) issuing deferrals of the rules.
In the physically-traded derivatives market, business is being conducted as usual until further guidance is issued by regulators. The listings of certain energy contracts have changed and commodity position reporting is not yet fully in line with the new requirements in all cases, but this seems to have had little impact on trading volumes or practices so far.
The issuing of ISINs or other types of LEI remains a difficulty. Some NCA rejections are not being automatically routed on to clients, and in some firms are manually processing XML messages and are dealing with exceptions on a case-by-case basis as a temporary fix.
It is widely reported that where product providers have not passed to distribution channels the full set of product data required (which includes “target market”, for example), distributors have temporarily suspended distribution of those products. Indeed, some non-EU product providers are only now becoming aware of the need to supply such data.
Where data is provided, the figures being presented on the underlying costs and charges of a product are, unsurprisingly, coming under increasing commentary. The figures are based on the methodologies prescribed by the PRIIP KID rules. (Whereas the PRIIP KID is required only for products acquired by retail investors, MiFID II requires similar data to be provided to all types of clients.) Fund managers, for example, have long expressed concern that the PRIIP KID methodology for underlying transaction costs would yield extreme and misleading results.
Meanwhile, other than in the Netherlands and the UK where there are wider bans on inducements, how to evidence in practice that an inducement “enhances the quality of the service to the client” remains a mystery. Also, the application of the inducement rules to investment research is likely to take some time to bed down, for both investment banks and asset managers. The deal done between the FCA and the SEC was welcome but came very late in the day.
It is going to take time for firms and regulators to work through these and other “teething” issues. In some case that may take a couple of years rather than weeks or months. The degree to which the regulators will accept firms not yet being in complete alignment with the new or expanded rules is likely to vary from regulator to regulator and from issue to issue. There will be increasing pressure from clients and industry commentators for key aspects of the “investor protection” rules to be fully implemented. How smoothly these tensions will play out and be resolved is one of 2018's regulatory unknowns.