For securities lending activities, MiFID II places responsibility on the lender for ensuring that a borrower of safe custody assets provides appropriate collateral and accounts for value variables during the borrow period.
This requirement applies in triparty agreements if the lender is still arranging for the transaction to take place.
However, although lenders must take responsibility for collateral, they are not required to hold the collateral directly, thereby allowing for central clearing to operate in the market.
As a directive, MiFID II is prescribed at an EU level, laying out particular aims and requirements. The rules are transposed into law in each EU member state.
Under MiFID II, investment research must be bespoke to each institution, and investment firms must pay for research with their own funds, or through a separate designated account, which is charged to the client.
This means that post-trade issues such as research payment policies should be resolved before today’s deadline.
The European Securities and Markets Authority (ESMA) seemed resolute in its stance that no further compliance extensions will be offered ahead of January.
Though there were teething problems with legal entity identifiers (LEIs) before today’s deadline. LEIs are a 20-digit, alphanumeric code that enables clear and unique identification of legal entities participating in financial transactions.
In December, ESMA issued a delay to the enforcement of its legal entity identifier (LEI) requirements.
In a statement, ESMA explained that it had learnt that not all investment firms succeeded in obtaining LEI codes from all their clients ahead of the deadline.
To allow for a “smooth introduction” of the LEI requirements, the temporary introduction period aimed to allow investment firms to provide a service triggering the obligation to submit a transaction report to the client.
The introduction period would not need an LEI code under the condition that before providing such service the investment firm obtained the necessary documentation from this client to apply for an LEI code on his behalf.
Since it was entered into force in July 2014, industry opinion on MiFID II has differed.
Russell Napier, co-founder of ERIC (Electronic Research Interchange), commented on the risks of a research price war as MiFID II comes into effect.
He said: “Costs remain unclear, even at this late stage, and some commentators have questioned whether providers will charge unreasonably low fees for access to their output.”
“While fees for a range of research services have suffered downward pressure since this time last year, peppercorn prices are unacceptable.”
Though, Christopher Woolard, executive director of strategy and competition at the Financial Conduct Authority (FCA), said: “MiFID II introduces substantial and wide ranging measures designed to improve investor protection and promote market integrity.”
Didier Roubinet, chief strategy officer at data management technology provider NeoXam commented: “Far from being the end, today marks the start of numerous fresh compliance headaches that financial institutions will have to overcome in 2018.”
“Firms will almost certainly have to make amends to their existing systems and processes based on the varying feedback they receive from local regulators.”
There are those in the industry who think that MiFID II could restrict liquidity in the market and have a negative effect on securities lending and repo, including Anna Biala, a partner at Clifford Chance.
Speaking at the The Network Forum in Warsaw in June 2017, Biala stated that segregation rules under the directive are quite restrictive, and “the risk is that this will disrupt the flow of collateral in the financial systems, which is quite problematic bearing in mind that various regulations now require additional collateral”.
The UK’s FCA acknowledged that implementation of the directive before the 3 January 2018 deadline represents a challenge for firms, “particularly given that important issues concerning the interpretation of the legislation are still being resolved”.
But it added: “We expect firms to take reasonable steps to meet this deadline.”
“Such firms must have contingency plans in the event that by 3 January 2018 they do not have the required permissions.”
Alexander Dorfmann, director product management at SIX, added: “2018 will be the year where the compliance focus shifts from data consistency, to data quality. Expect firms to be putting the pressure on market data vendors to provide one really strong source of information.”