Deputy Head, Brussels, Cicero Group
On 14 March 2016, the European Commission informed ESMA that it would only endorse RTS 2 if ESMA made limited and targeted amendments to the liquidity thresholds and the SSTI waiver. This sets in motion a delicate and potentially time consuming process whereby ESMA is invited to review the Commission’s concerns and draft amended standards. In practice, the hope is that ESMA can amend the RTS quickly and pass them back to the Commission without too much delay but there is no guarantee that this will be the case.
The first question is whether ESMA will accept the Commission’s proposals. The Commission is only supposed to amend draft RTS in “very restricted and extraordinary circumstances” and only if one of the following criteria is met: ESMA’s proposals were disproportionate, in breach of union law or in conflict with EU financial services legislation (recital 23 of ESMA’s founding regulation). We can assume that the basis of the Commission’s changes relate to the third point since both the definition of liquidity and the thresholds for the SSTI have both been accused of being in breach of the level 1 text.
We have seen plenty of instances of where the supervisors have rejected the Commission’s amendments. With the IRS clearing obligation, ESMA agreed with the basis of the Commission’s amendments but rejected the content. Recently on the Bank Recovery and Resolution Directive (BRRD), the European Banking Authority rejected the Commission’s amendments on the grounds that they did not meet the criteria under which they can amend the text. Both of these instances resulted (or in the case of the BRRD, will result) in lengthy delays, primarily because the Commission then needs to review the supervisors’ amendments and decide whether to approve them. In the case of EMIR, this took 3 months.
The letters sent from ESMA back to the Commission on 21 March appear to confirm that ESMA has accepted the basis on which the Commission is proposing amendments, albeit with some clarifications on how to interpret the Commission’s request. ESMA will now carry out an analysis to determine if the content of the Commission’s proposed changes are workable. ESMA has six weeks to do this and submit amended draft RTS to the Commission.
The Commission has been working closely with ESMA throughout this process and the idea is that they will be able to come back to the Commission swiftly and well within the time limit. The Commission would then be able to approve the revised RTS quickly. With the Parliament and Council concerns addressed, their approval should also be swift, meaning that the overall process may not be delayed.
However, this is an optimistic assessment. Even if ESMA fully agrees with the Commission’s suggestions there is plenty of bureaucracy to make a quick turnaround difficult. ESMA will probably have to sign off the amended RTS at a board meeting. The Commission will then need to approve the amended RTS in the College of Commissioners. Both of these processes take time.
This points toward the possibility of a phased implementation with these RTS coming in at a later date. The Commission will want to avoid this but the prospect of delayed sign-off and the time taken to build the necessary systems by the industry and regulators makes this look increasingly likely.
The Council is currently looking to add an amendment to the legislative proposal to delay the start date of MiFID II to 2018 that would ensure that there is a nine month gap between the publication of regulatory technical standards in the Official Journal of the EU and them coming into force, which would give national authorities sufficient time to prepare for implementation. This looks like a possible solution for how a phased introduction might work.
Email the author: James.Hughes@cicero-group.com