Market participants questioned the European Commission’s decision not to require exchanges to publish the costs of producing market data at a roundtable hosted by the UK Financial Conduct Authority.

The FCA hosted a MiFID II Implementation Roundtable for trade associations on 26 May but the minutes were only published on Friday.

Fund managers have long complained that market data costs from European exchanges are too high compared to the US, and commercial attempts to provide a rival consolidated tape in the region have failed. There had been hopes that MiFID II would cap market data fees or require more cost transparency. However the European Securities and Markets Authority decided that market data fees could be based “on the cost of producing and disseminating such data and may include a reasonable margin”, without defining a reasonable margin.

The minutes said: “On market data, questions were asked around what reasonable and excessive margin looks like if trading venues are not obligated to disclose costs of producing market data.”

The FCA replied that the European Commission’s decision not to require publication of data on costs reflected the views from member states who were concerned that the information was commercially sensitive and that judgements about whether data pricing was reasonable would be examined through the ongoing supervisory relationship.

At the roundtable questions were also raised around the calculations to determine whether a firm is a systematic internaliser, particularly around class and subclass definitions. The FCA confirmed that Esma is expected to do some work on interpretive Q&As that will provide additional clarification for firms.

The FCA also said Esma was likely to do further work on investment research and asked attendees to provide views on exactly what they thought required Esma clarification.

The roundtable was held before the UK referendum on June 23 resulted in a voted to leave the European Union. The Brexit process will not begin until the UK triggers Article 50, the relevant pause in the EU treaty, and departure then has take place within two years. Therefore the UK will have to comply with MiFID II as it comes into force at the beginning of 2018, when the UK will still be a member of the EU.

Negotiation of trade agreements cannot even begin until the UK has left the EU and financial firms in the UK could lose the passporting rights giving them access to the remaining 27 EU member states. The UK could negotiate to become a member of the European Economic Area, like Norway, which allows access to the Single Market but would have to agree to continue the free movement of people, so is unlikely. Another likely option is the negotiation of a free trade agreement but direct access for financial services would be restricted even if the UK has met the MiFID II requirements.

Chris Bates, partner at law firm Clifford Chance, said at a conference after the referendum that there are many regulatory implications of leaving the EU, even if the UK has met the requirements of MiFID II.

“The non-discrimination rules will  no longer apply.” Bates added. “For example, some EU members only accept financial collateral from another EU member state.”

Brexit will affect reporting under MiFID II, which covers trading on all venues in EU, and UK firms could lose remote access to EU exchanges. Bates said: “European regulators will not get reports from the UK so there will be a massive loss of transparency and visibility. There are no means for regulators to share this data as co-operation agreements have to be rebuilt.”

MiFID II also requires exchange-traded derivatives to be transacted on an authorised EU venue and for EU authorised central clearers to provide clearing services, unless there is an equivalence decision.

Equivalence is when European regulators recognise that the legal, supervisory and enforcement arrangements of a non-EU country are equivalent to EU  requirements. This is necessary for a market infrastructure, such as a central counterparty, trade repository or credit rating agency established in a non-EU country to provide their services in the trading bloc.

Michael Thomas, partner at law firm Hogan Lovells, said in a webinar last week: “This is crucial for CCPs. Counterparties who clear trades through a non-qualifying CCP have to set aside more regulatory capital which will make trades more expensive.”

Thomas continued that the UK already meets EU regulations so there is no reason that UK-based CCPs should not be given equivalence. “However politics is crucial and there are moves afoot to ensure euro-denominated clearing takes place in the EU,” he added.

This year the European Commission agreed an equivalence decision on derivatives clearing organisations in the United States after many years of negotiations. Thomas pointed out that after leaving the EU, the UK will have to negotiate its own agreement with US regulators. “‘We would expect the US CFTC to agree but nothing is certain in international negotiations,” he said.

TheCityUK, a lobbying group for the City of London, said in a report last week that Brexit creates challenges such as the potential loss of the current level of access to the EU single market but also creates opportunities. The study set five priorities in order for the UK to sustain a competitive – connecting globally; driving national growth; expanding services; innovation and disruption; and building skills and attracting talent.

The lobbying group wants the UK government to negotiate an effective relationship with the EU that maintains mutual market access but also enhance trade and investment with developed markets, including the US and Japan, and emerging markets.

More on MiFID II:

• MiFID II Implementation: “Hurry Up and Wait” (by Chris Tiscornia, Westminster)
• Industry Prepares for MiFID II Time Sync 
• Brexit to Reveal Regulatory Rocks