Regulators will grant financial firms a six-month delay in implementing part of the sweeping MiFID II overhaul of rules set to take effect on Jan. 3, as both companies and countries struggle to meet the deadline.
The European Securities and Markets Authority on Wednesday proposed the grace period for a requirement that companies wanting to trade with any party based in the European Union will need a code, known as a legal entity identifier, or LEI. The identifying code lets firms continue to trade after MiFID's Jan. 3 start date. Industry groups and regulators have been urging firms for months to register, saying: "No LEI, no trade."
It's the latest sign that watchdogs are taking a softer stance when it comes to the sweeping Markets in Financial Instruments Directive, as many firms are not yet fully prepared for the seismic shift in everything from trading to research distribution. The U.K.'s Financial Conduct Authority has said it, too, won't be too hard on firms not in compliance with MiFID — at least at first. And in the U.S., Wall Street banks won a reprieve this month from their main swaps regulator. That followed a whopping 30-month grace period from the Securities and Exchange Commission to iron out conflicting U.S.-EU rules on research payments.
"Firms don't want to become the focus of regulators' attention," Rebecca Healey, head of European market structure at Liquidnet Holdings, said in an interview. "Are they going to be hammering down the door on day one? Probably not. Does that mean firms should be complacent in implementation? Definitely not, as the regulators will be looking at this during the early part of 2018."
During the six-month period of relief, investment firms may trade with clients under the condition that before providing services, the firm must obtain the necessary documentation to apply for an LEI code on its behalf.
Many firms will find ESMA's "surprise" move a hindrance because they have already built systems that will reject trades that lack an LEI, says Jake Green, regulation partner at law firm Ashurst in London.
"It is not a walk in the park," he said in an email. "Many firms will actually find this of no help."
Many of the 28 EU countries are still racing to convert MiFID II into national law or regulations. Valdis Dombrovskis, the EU commissioner in charge of financial services policy, said earlier this month that financial markets could face "disruptions" caused by their lag in implementing the law. The Netherlands, Portugal and Spain are among the countries that haven't finished the process, the European Commission has said.
This last-minute dash puts pressure on regulators across the EU to show lenience as the law comes into force.