Mifid's Architect: Esma Chair Steven Maijoor

“Let me say something before we start: Everybody needs to understand that the obligation will start as of the 3rd of January.” Steven Maijoor made this statement about the compliance deadline of the revised Markets in Financial Instruments Directive (Mifid II) before I even turned on my voice recorder during our meeting at Esma’s offices in Paris.  

Technically, he says, market participants had four years to prepare; they should have started in 2014, when the revised version of the directive was approved, so from his point of view this was a “sufficient period of time.” On that basis, it is up to the stakeholders to do their utmost to make sure they will comply with the requirements right away.

Does this mean that we will see National Competent Authorities (NCAs) allocating fines throughout Europe whenever they spot Mifid II compliance failures, similar to what the UK’s Financial Conduct Authority (FCA) did recently when it fined Merrill Lynch $45 million for failing to comply with the European Market Infrastructure Regulation (EMIR) reporting obligations?

Even though Maijoor has been vocal on strict enforcement tactics in the past—which was evident in his keynote address during Esma’s Mifid II October event in Paris—he now uses a slightly softer, more reconciliatory tone. “I don’t think it would be the smartest strategy to set maximum enforcement capacity on non-compliance on the 4th of January,” he says. He clarifies, however, that Esma can’t and won’t intervene in the national regulators’ policies or actions. He says he trusts that Europe’s various national regulators will make smart choices in terms of supervisory priorities, utilizing their somewhat limited resources wisely and that they will look very differently at a non-compliance issue on January 4 than if it were to arise at a later date. In any case, failing to abide by the law either partially or wholly should ring the bell for regulatory intervention, he adds.

One thing Maijoor is certain of is that the possibility of Esma issuing “no-action” letters, like his counterparts in the US and Asia do in some cases, is out of the question. “In Europe, we simply cannot ‘disapply’ the law,” he says. “We had a similar discussion with the US regulators regarding the margin requirements in bilateral trades in the case of over-the-counter (OTC) derivatives, where they wanted to apply no-action letters, but we said we couldn’t do it because this is not how our regulatory system works.”

No Dystopia

January 4 is not going to bring about scenes of the Apocalypse to the markets; on the contrary, Maijoor hopes that investors will find in Europe a safer place to do business, a place where everything is transparent and lit trading prevails. “We hear these voices that there will be chaos, but from our perspective, there is no reason for this to happen,” he says. “But, of course, I have no full insight into how well-prepared market participants are. But after all, this is their responsibility.” 

Maijoor has been involved in many market reforms during his professional life, having chaired Esma since 2011 and, prior to that, the Netherlands’ national regulatory body, Autoriteit Financiële Markten (AFM). Anxiety is a normal phenomenon in the period before the implementation of a new law or regulation—markets, he says, do not like change. “We had the same situation in the months leading up to EMIR,” Maijoor says. “If you ask stakeholders now, they’ll say it is a good piece of legislation and I am optimistic we’ll get to the same place with Mifid II.”

That said, he acknowledges that it is indeed a complicated and expensive piece of legislation, with severe implications for all firms’ IT systems, which fundamentally changes the way Europe trades. In that sense, Esma will continue to provide market participants with compliance advice after the implementation day. The Authority is also open to making any necessary amendments to parts of Mifid II that might prove practically difficult to adopt. “Typically, when new legislations start to work, you see which areas work well and which can be improved,” Maijoor says. “Whenever we have any market developments or feedback from the stakeholders that certain parts could function better, we’ll make further changes and look into the toolbox in terms of how to do it, either with a Q&A or a guideline, or even a technical standard.”

This should not be interpreted as Esma’s willingness to “undo” the law. Participants’ questions are often contradictory due to conflicts of interests, and despite the regulator’s efforts to square them and find the right balance, at the end of the day, Maijoor says, “it is a very specific law they have to follow.” 

At the same time, he says he wants to reassure everyone that there are no “Mifid III” plans in the works, despite recent claims to the contrary by the Welsh Conservative member of the European Parliament, Kay Swinburne. “Obviously, there is no other big reform in the pipeline after Mifid II, but what there will be is further fine-tuning of the existing pieces of legislation,” he adds. 

Mifid II was already an extremely complicated project for Esma to carry out, with constant struggles and obstacles along the way. It was a project that, no matter how hard Esma worked, was surrounded by an air of uncertainty on the morning of June 23, 2016, when Europe woke up to one of the most unexpected political developments in modern history: Brexit.  

Brexit

“Mifid II was designed with the implicit expectation in mind that Europe’s biggest market was going to be part of the Union,” Maijoor explains. He says Brexit poses specific risks to the European markets, and subsequently complicates Esma’s efforts to shape a single regulatory framework across the continent. It is a development no one in the European Union predicted, and Esma had to act quickly to come up with contingency plans not only for the survival of Mifid II but for the viability of the capital markets in the rest of Europe, too. 

One of the most critical aspects of the legislation’s future involved addressing the UK’s withdrawal from Esma’s database. The Financial Instruments Reference Data System (Firds) will become available to participants nine months into the new regime. In its full capacity, the system would host reference data from all 28 jurisdictions, two-thirds of which were supposed to be filled by the UK market. Esma has been working on an emergency plan, and according to Maijoor, the political negotiations will determine how big the impact will be. “If the negotiations last longer and the country remains part of the single market, the outcome will be different than if it becomes a third country soon,” he says. “On a technical level, I would expect some calibration [of the database] because the UK is the most liquid market.” 

The Authority is looking to protect its regulatory power and preserve the status quo of the European financial markets after the UK’s departure. To do that, it has focused on two areas. 

“First, we need to rethink the way we cooperate with regulators outside the EU,” Maijoor says. “This so-called equivalence framework is necessary because once a third country is declared equivalent, we fully rely on its national regulator.”  

With the UK becoming a third country once Brexit negotiations conclude, Esma loses the leverage of assessing specific risks coming from the region, whenever a trading activity of an EU instrument takes place. For example, it may not be possible to ask regulatory questions of UK market participants or ask for relevant information as there will be no supervisory relationship. “The current model is that we fully depend on the goodwill of the third-country regulator,” says Maijoor. “We have been very explicit on changing it and assimilating the regulatory practice of Asia, for example, where regulators can directly supervise third-country market participants if they have trading activities in the region.” 

That’s why he thinks the Commission’s proposal for the relocation of the Esma-registered central counterparty (CCPs) clearinghouses from London to the EU27 should materialize sooner rather than later. “It is a smart proposal to have both options, the one of supervision outside the EU and the model of relocation since there has been demand for monetary and stability reasons,” he says. “We have also argued that we should extend that model to benchmarks, credit rating agencies and possibly also to trading venues.”

The second area Esma is working on is the danger of the single legislative framework dismantling as a consequence of firms leaving the UK and relocating to one of the remaining EU countries. The problem is that some of the financial centers in Europe are trying to win UK market participants over with “attractive interpretations” of the supervisory requirements, a practice that Esma worries might result in regulatory dissolution. “It relates to issues like resourcing and delegation, meaning that UK participants will get a license somewhere in the EU and then decide on the base of resourcing and delegation to keep all their activities in London,” Maijoor says. 

It seems that the situation at some point got out of hand and in May 2017, Esma was forced to release an opinion, where it announced the creation of a forum—the Supervisory Coordination Network—to allow NCAs to report on and discuss cases of relocating UK market participants. In this opinion, Esma stated that the forum would help to promote consistent decisions by NCAs, warning that it is prepared to take further measures to support supervisory convergence, including issuing Q&As, providing additional opinions to NCAs, and conducting peer reviews. 

Under these circumstances, and as luck would have it, the European Commission published a controversial proposal, whereby the Authority, from Brexit onward, will have broader and reinforced responsibilities in the EU27 area.

New Superpowers

On September 20, 2017, Esma, together with the European Banking Authority (EBA) and the European Investment and Occupational Pensions Authority (Eiopa), were given sweeping new powers from the European Commissioner for the Euro and Social Dialogue, Valdis Dombrovskis. The proposal was met with heavy criticism by members of the European Parliament, as well as by some industry lobbyists. The changes would allow Esma to act immediately in market abuse cases, circumventing the NCAs’ enforcement strategies, as well as directly supervising a broader spectrum of the financial markets legislation, such as critical benchmarks.

Maijoor says this is the Commission’s second big step toward a much needed capital markets union. The first step was the substitution of the Committee of European Securities Regulators (CESR) in 2011 with Esma. 

Before Esma, he says, there was no possibility for technocrats to write the rules and everything was done by the Commission. “It has proven much more effective to allow technicians to handle such a complex industry—of course, provided that the political, democratic legitimacy is maintained,” he adds.

The proposal takes Esma’s priorities and responsibilities to a whole new level, as the Authority ceases to exist solely as the guardian of supervising consistency among national regulators. And, according to Maijoor, there are three reasons why this is good. “We now have the experience,” he says. “We know how the system works, we have been doing it for six years, and so far the rulebook has worked pretty well.” 

Nevertheless, the level of consistency in supervision remains substantially imbalanced throughout Europe as the enforcement practices create inequalities in the treatment of market participants. “Sometimes it’s interesting how excited we get about the rules, but in the end we see how differently these rules are applied,” he adds. 

The second reason is Brexit, which is expected to create deeper boundaries between the UK and the EU27 markets. According to Maijoor, this means that European markets must rely less on third-country markets, and continue to grow on their own. “It is a combination of improving the interactions with third-country markets with developing a capital market with reduced barriers, making it simpler for stakeholders to do business across the continent,” he explains.

The third but most crucial reason is that different sets of rules should be supervised at the right authority level. It makes sense, for example, that the consumer side of the financial markets should be monitored by national authorities since the trades involve domestic assets and checking an investment firm’s file in the local language. “On the other hand, if you look into some parts of the wholesale market, these are already very European,” Maijoor says. “Data issues or benchmarks, or CCPs or even the prospectus regime must be dealt with on a European level.” 

For instance, when Esma initiated the Firds database project, it was initially allocated to a national level, which resulted in frustration, given that complex delegation arrangements had to be delegated upward to Esma. “I think it will be much more reasonable to do these things right away on an EU level as this system is more efficient and it avoids duplication and increases consistency,” he adds.

Pain Point

But of course, to achieve all of these things, Esma’s funding needs to be increased, which has been the Authority’s internal pain point since its founding six years ago. 

The European regulator has received €40 million each year, while in comparison, the FCA receives €400 million. Esma thinks the Commission’s plan is reasonable and is in line with the Authority’s ambitions. The reality, however, is that this is just a proposal, which is hardly ever identical to what the European Parliament approves. “All we can do now is to wait and see the final draft,” says Maijoor.