When assessing the biggest challenges they expect to face over the next five years, more than half of respondents (53%) cited regulatory burden as the main issue facing their companies, according to a new Acuiti report.
Regulatory burden has been a major concern for market participants since the 2008 global financial crisis, and the Acuiti report, in partnership with the FIA, added that the new framework is “lengthy and complex” and that responding to current regulatory requirements will require the mobilization of significant resources.
Although the majority of respondents felt that the level of European regulation for their respective companies was disproportionate, it is noteworthy that around one-third of respondents were indifferent to this perspective.
Looking at specific EU regulations, the Investment Company Directive (IFD) and the Investment Company Regulation (IFR) are highlighted as the most challenging, with over half of respondents expecting “significant” or “big” challenges relating to the implementation of these regulations.
European capital regulations, including the IFD and IFR, impose a significant compliance burden on principal trading firms and have a significant impact on the prudential requirements to which these firms must comply.
The report noted that the cost implications have led various major trading firms to abandon Mifid II licences or relocate their headquarters or certain trading desks outside the EU.
Interestingly, when looking at future risks to the European exchange-traded derivatives market, regulatory risk was found to be the second most concerning risk among respondents, slightly lower than cyber risk.
“Regulation is a constant in the exchange-traded derivatives markets: when one framework comes into effect, another typically follows,” Acquity said in the report.
“While market participants often support the objectives of regulations, there are often unanticipated consequences from proposed rules that require significant lobbying efforts to counter or mitigate them.”
Brexit
Elsewhere in the report, Accutey looked at the impact of Brexit, just over four years after the UK left the EU. Regarding the impact of Brexit on London as a financial centre, the majority of respondents (51%) believe that London will remain a financial centre, albeit reduced in size and influence.
While there was an initial view that Brexit would lead to regulatory independence from the EU, the report suggests that interest in this route has changed.
A significant proportion of respondents (41%) feel that the UK should pursue some degree of deviation from the EU, but note that this should not come at the expense of equivalence with EU regulations. A larger proportion (45%) feel that the UK should seek convergence with EU law to reduce regulatory fragmentation.
“The European exchange-listed derivatives industry has faced various challenges over the past five years, but market participants are optimistic about the next five years,” Aquity said in the report.
“The challenges have not gone away – the effects of Brexit are still being felt and cyber risks pose a growing threat to systems and regulations, placing ongoing strain on operations. However, rising to these many challenges has also emerged as a stronger, more resilient industry.”
