Regulators have granted a reprieve to three clearing houses in Germany and Britain from having to give customers more choice under the new EU market rules under MiFID II, which was rolled out today.
The Markets in Financial Instruments Directive, also known as MiFID II, is the name for the EU’s regulatory reforms set to transform Europe’s financial industry. Nearly 10 years in the making, it is designed to bring more transparency and competition to financial markets in Europe.
One aim of these reforms is to make it easier for people to clear the listed derivatives contracts they buy and sell. Clearing houses sit between two parties in a trade to manage the risk of one side defaulting.
It is the ‘open access’ rule that allows this to be achieved by stopping requirements to clear a derivative contract within the same exchange group that traded the contract.
However, the Financial Conduct Authority (FCA) said that applications for an open-access waiver came in from ICE Futures Europe and the London Metal Exchange (LME).
Granting this privilege means the exchanges would not yet have to make the changes allowing customers to clear contracts elsewhere.
The FCA decided to grant the extension, explaining it would ensure the ‘orderly function’ of clearing in Europe.
The two exchanges have been given an extra 30 months to comply with the MiFID II rules relating to trading and clearing.
In granting the extension the FCA said: “Accordingly, with effect from 3 January 2018, ICE Futures Europe and LME will not be required to consider open access requests … as they relate to exchange-traded derivatives, until the expiry of the transitional period on 3 July 2020.”
BaFin, the German markets regulator, has similarly announced that the same time-limited waiver has been granted to Deutsche Boerse’s Eurex Clearing arm.
Eurex argued that, with the UK as Europe’s largest market for clearing derivatives, Brexit has introduced too much uncertainty as Britain may not be bound by the rules once it leaves.
Open access has been part of share trading and clearing for many years, but introducing it to listed derivatives has caused disruption.
These proposed reforms of Europe’s clearing industry would potentially increase the links between London and the rest of the EU. However, this is contentious as the UK’s relationship once it leaves the trading bloc is unclear.
Some EU policymakers and Deutsche Boerse have warned about the financial risks posed by opening up derivatives clearing to competition, but critics say this is just an excuse to prevent competition.
According to brokers, these delays may depress trading volumes in January as the reforms start to come into effect.
Many banks and brokers sought to upgrade their IT systems before MiFID II, which requires more detailed reporting of trades. Consultancy group Opimas predicts the reforms will cost the finance industry more than €2.5bn to implement, and the largest banks will spend more than €40m each on compliance.