Transparency Troubles What the MiFID II? German watchdog merciful as banks struggle with new rules

New EU financial rules that came into force this year are giving bankers sleepless nights because they're so difficult to implement. Germany’s top regulator is giving them leeway to sort out teething troubles.
Quelle: Bloomberg
MiFID II is causing exactly this many problems.

It turns out that MiFID II isn’t just a handful of letters, it’s a handful to implement, too. Perhaps that is why Germany’s top financial watchdog has promised to be lenient with banks that are having trouble coping with Europe’s biggest financial markets reforms in a decade.

“We won’t bite the head off anyone who is making serious efforts to implement the new rules in a timely manner but isn’t able to, for example because the IT system is causing problems,” Felix Hufeld, president of Germany's federal financial watchdog BaFin, said in the text of a speech delivered Wednesday at the authority’s New Year reception.

The Markets in Financial Instruments Directive II, or MiFID II, is an amendment of a 2007 set of rules. It marks the European Union’s first serious effort to draw the lessons of the financial crisis and make markets more transparent. The rules came into force at the start of the year and affect banks, asset managers, brokers, bourse operators and pension funds. But it's been a rocky start – many banks are complaining that the changes are costly and complicated. Even experts still struggle to fully understand it.

We keep a sense of proportion in pursuing our supervisory principles. Felix Hufeld, German financial regulator

The new rules have even forced some banks and brokers to suspend trading operations in Europe. In Germany, online banks in particular have struggled to meet the requirements. ING-Diba this week confirmed it had pulled some 80,000 derivatives from its offerings until it can comply with the new rules. Mr. Hufeld suggested he’s not worried about such temporary gaps as long as progress is being made. “We keep a sense of proportion in pursuing our supervisory principles,” he said.

Is it all worth it? According to Mr. Hufeld, it will take time to assess whether and how the new rules are working. “It wouldn’t be surprising if we had to amend MiFID II here and there,” he said. “There’s a reason why an assessment of major new changes resulting from the directive is planned — but only in around two years.”

To be sure, the directive promises a lot of improvements. The new rules should make trading platforms for stocks, bonds, commodities and derivatives more transparent. That should allow investors to easily check whether they are getting the best deal. The goal is to enhance competition and improve financial advice. A wider range of trades must also be reported to regulators, with data to be scanned in order to spot market abuses.

On the downside, analysts estimate that MiFID II will cost $6 billion (€5 billion) to implement in the first five years. The directive had already been delayed by a year to give bankers more time to prepare for it. But there remains widespread confusion about its implementation and how it will dovetail with regulations in the United States. Some elements were delayed just days before launch. It also comes at a time when many countries and banks are already struggling with how to adopt a different set of global capital rules, dubbed Basel III, that were agreed at the end of 2017.

Mr. Hufeld defended the global rules, too. “Basel III benefits everyone ... but it won’t be a walk in the park for anyone,” he said. The key now was for all countries to enshrine the agreed rules in national law “without cherry-picking or watering down standards.”

Basel III, devised by the Basel Committee on Banking Supervision, refers to a broad set of measures to strengthen the supervision and risk management of internationally-active banks. It’s been a particular sore spot for Germany, which has many smaller regional banks. These institutions believe they should be exempt from the tougher regulations.

The EU plans to apply the rules to all banks, though Mr. Hufeld said he still hoped that smaller banks would be given leeway. “We’re discussing whether and how we can tailor the rules more proportionately to smaller banks in the EU without sacrificing stability,” he said.

Andreas Kröner is a correspondent covering stock exchanges and and financial market regulation for Handelsblatt and is based in Düsseldorf. David Crossland adapted the story into English for Handelsblatt Global. Christopher Cermak of Handelsblatt Global also contributed to this piece. To contact the authors: [email protected]