Tomorrow will mark the one month anniversary of the Mifid II implementation. A far cry from the big bang most of the market was expecting on January 3 of this year, the Mifid II compliance deadline has turned out to be much more of a “soft launch”-type of event.
After the actual Big Bang, the nascent universe went through an extended period of cooling for about 300,000 years, but in the new post-Mifid II universe, activity seems to be heating up rather than cooling down. In line with the bull market we’ve found ourselves in for the better part of a decade, January has been a month of rising trading activity.
The much-feared liquidity crunch, in other words, did not come to pass. From the initial data we can see that derivatives that were previously traded over-the-counter have been displaced en masse to volumes traded through systematic internaliser. Large in scale and block trading have seen a similar increase in volume.
Rather than a big bang on January 3, regulatory experts are now predicting a stop-and-start process of regulatory change. New elements of the regime will come into force in March, when the double volume cap will impose limits for products traded in dark pools and then again in June, when several rules for commodity traders will likely cause uproar in that corner of the market, and finally in September, when the systematic internaliser regime will come into full force. We will probably only find out the true nature and effect of the direct electronic access provisions after the first company gets a regulatory slap on the wrist for interpreting the law in too liberal a way.
Further out into the future, the forbearance period for open access, which will last for an impressive 30 months, has the potential to change how derivatives are traded and cleared. What is more, calculations for the double volume cap, position limits and which firms are considered systematic internalisers in what products, will have to be re-calibrated periodically, in some cases every year.
In this sense, you could say that we have entered a brave new world. Whereas companies could function by focussing their compliance efforts in the months before a new regulation came into force, they will now have to keep one eye on their compliance efforts even as they conduct their day-to-day business.