By Huw Jones
LONDON (Reuters) - A sweeping reform of European Union financial markets will come in with the New Year on January 3, a year late due to its complexity and after eleventh-hour handholding by regulators keen to avoid any trading snarls.
The new rules shine a spotlight on the innards of stock, bond, commodity and derivatives markets by forcing banks, asset managers and traders to report detailed information on trillions of euros in transactions.
Banks and trading firms have spent millions of euros getting ready for the big day. A report from Expand, part of the Boston Consulting Group and IHS Markit, has estimated that top global banks and asset managers will have spent $2.1 billion this year to comply with the new regime.
The aim is to apply lessons from the 2007-09 global financial crisis by increasing transparency in trading and bolstering investor protection.
It will mean that stock, bond, derivatives, commodity and other trades must be reported to a repository, a trove of data that supervisors can use to track trades and spot risks.
Regulators, already complaining they have too few resources, will sift through the data to try to spot bubbles early after failing to see the last crisis coming.
In run up to the launch, bankers will work through the night to check that high-speed reporting connections with customers and trading platforms work from day one.
Fund managers and others must for the first time fill in a transaction report with up to 65 bits of data within 15 minutes of a trade - or risk being fined.
Originally due to come in at the start of 2017, the EU was forced to give banks and regulators another year to get ready for the rules, known as MiFID II or Markets in Financial Instruments Directive II. They represent a major overhaul of the 2007 MiFID law to improve transparency and investor protection and broaden its scope to take in more financial products.
MiFID II will be a journey and not a one off event in January, is how one national regulator responded to questions about how trading will unfold on January 3.
The bloc's European Securities and Markets Authority is overseeing the rollout and published a flurry of statements this week to tackle some remaining roadbumps and calm nerves.
"ESMA, in close cooperation with the national regulatory authorities across the EU, has carried out a broad range of work, even within the last few days, to ensure that the framework is in place to ensure a smooth transition from MiFID I to MiFID II," ESMA Chairman Steven Maijoor told Reuters.
Even with the extra year, only 11 of the bloc's 28 member states have written MiFID II fully into national law, prompting ESMA to say that all firms can carry on even if their home state is among those countries that have not completed the legislative process.
It also said that a requirement for each party to a stock, bond or derivative trade to have a unique identifier for reporting transactions would put be on hold for six months.
Germany, France and Britain, home to the EU's top financial centers, are among the 11 EU states whose national laws are up to speed and big banks are likely to be ready.
Royal Bank of Scotland's (L:RBS) NatWest Markets has conducted a "soft launch". From January 2 to January 4, some of its staff will work through the night.
"Day One will hopefully go smoothly and we are as ready as we can be," Giovanni Mazzocchi, head of macro distribution in Europe for Barclays (L:BARC), said.
"There are a few overnighters going on to make sure everything will work on the day."
There are concerns over smaller players who cannot afford teams of extra staff to get ready in time.
But industry officials predict light trading volumes initially rather than paralysis.
"It's in nobody's interest that the markets will freeze up. Markets will be just fine, even if there is some nervousness as they adapt to the significant changes," Christian Voigt, senior regulatory adviser at Fidessa, a provider of trading software, said.
"As long as regulators give time to adjust, then all will be well."
Britain's Financial Conduct Authority has said it will initially take a "proportionate" approach to enforcement but laggards must show they are making an effort.
DISRUPTIVE
ESMA will use the data provided by markets to set curbs on the maximum size of commodity positions, and cap trading of shares in "dark pools" or off an exchange.
MiFID II gives investors more information about which trading platforms offer the best deals, and asset managers will have show investors who is paying for stock research.
ESMA has already begun flexing its new MiFID II muscles to curb or ban financial products. Shares in British spread-betters tumbled on Monday after ESMA outlined possible restrictions on the sale of complex products to consumers.
A fundamental aim of the original MiFID was to increase competition in share trading by allowing new platforms to take on centuries-old rivals like the London Stock Exchange (L:LSE).
Upstarts like Chi-X went on to become among the biggest pan-European share trading platforms and regulators want MiFID II to bring "disruption" to trading in other assets, forcing companies to become more agile and serve customers better.
"There will be interesting times over the next few years with new players entering the market and both clients and banks making full use of the new available data to shape their activities in the market," Mazzocchi said.
Voigt said MiFID II was not a revolution in share trading, but would have a big impact on bonds, commodities and derivatives, where electronic trading will increase.
"For fixed income and off-exchange derivatives, the whole mindset needs to change as a lot of trades are still done over the phone," Voigt said.
Karel Lannoo, chief executive of Brussels think tank CEPS which tracks financial services, said it will take six to 12 months for markets to fully implement the new rules.
