As highlighted by speakers at the FIA International Derivatives Expo in London last week, there are concerns surrounding the management of risk when the new MiFID II legislation takes effect from January 2017.
First applied in the UK in 2007, the Markets in Financial Instruments Directive (MiFID) is a framework of legislation for investment intermediaries and the organised trading of financial instruments. It is now being revised in order to further protect investors and improve how financial markets operate post-financial crisis, according to the Financial Conduct Authority.
Some European regulators are concerned about MiFID’s access to the central counterparty (CCP) as handling data and managing risk could prove to be difficult under these conditions.
The CCP is a clearing organisation that works in between the two parties in a transaction, becoming the seller to the buyer and the buyer to the seller. After this, the CCP will use risk management techniques to protect members from any losses.
Sander van Leijenhorst, senior supervision officer for the Netherlands Authority for the Financial Market says that a CCP should operate efficiently and manage risk effectively. “A CCP must be able to contain all the risks it is introducing. The whole point is to mitigate risk. If there is a regulatory requirement to provide access to a venue, but the CCP can’t mitigate the risk from that venue, that’s not good. Forcing the entire industry to access each other’s infrastructure is not good if it means that CCPs can’t mitigate the risk,” van Leijenhorst said.
According to Banking Technology, in order to introduce a fair and secure environment for securities trading and clearing in Europe, under MiFID II, trading venues and clearing houses will have to give access to any member that meets the minimum criteria. However, there are debates about whether CCPs are capable of handling risk or data breaches.
In addition to this, working with the new requirements that the European Market Infrastructure Regulation (EMIR) have in place, that focus on improving transparency and reducing derivatives market risks, could become problematic.
Patrice Aguesse, head of market regulation of the policy division at France’s Autorité des Marchés Financiers , explains that the rules of the MiFID and EMIR regulations contradict each other. “We need an overview of what’s happening. It’s not easy. We have to rethink the way bank resolution is done. It’s not easy because there are so many things that interact, including the conflict of laws. We are working on it,” Aguesse said.
Van Leijenhorst states that the real issue is CCP resolution. “There’s always a scenario where the margins are gone, and now you have to allocate a loss. In the end of the line, how do we allocate losses? You need a range of tools to do it,” van Leijenhorst said.