When I first heard an opinion: "MiFID II - regulatory monster" I used to think of it as a simple affectation.
I used to... Till the moment I came across the ESMA's interpretation of position limits aggregation within the groupings of undertakings.
ESMA's Discussion Paper on MiFID II/MiFIR of 22 May 2014, ESMA/2014/548, s. 409:
"Article 57(1) MiFID II requires that the limits shall apply on the basis of all positions held by a person and also those held on its behalf at an aggregate group level. ESMA's view is that this will require the aggregation of positions of a person (whether held directly by itself or on its behalf by third parties such as investment firms, under a client relationship) together with those of any wholly or partly owned subsidiaries of that entity, but not aggregation with the positions of fellow subsidiaries of a mutual parent or ultimate holding company."
In spite of a clear and unambiguous MiFID II definition of the "group" (containing the cross-reference to the Accounting Directive (2013/34/EU)), the European financial regulator proposes (ESMA's Discussion Paper on MiFID II/MiFIR of 22 May 2014, ESMA/2014/548) the aggregation of positions of a person (whether held directly by itself or on its behalf by third parties such as investment firms, under a client relationship) together with those of any wholly or partly owned subsidiaries of that entity, but not (!) aggregation with the positions of fellow subsidiaries of a mutual parent or ultimate holding company.
Contrary to the Accounting Directive (where the 'group' definition expressly comprises a parent undertaking and all its subsidiary undertakings) the MiFID II position limits controls are proposed not to encompass all sister companies. Why? ESMA's Discussion (?) Paper does not contain the reason for that.
What's the problem to partition positions between sister companies within the conglomerate to circumvent the position limit? Does such a possibility appear entirely transparent for the regulator?
And maybe I don't catch the intention or the mechanism... Maybe I would do, if the reasoning were available.
ESMA's mandate to develop draft regulatory technical standards formally covers "the methods to determine when positions of a person are to be aggregated within a group" (MiFID II Article 57(1)(12)(b)).
However, the Accounting Directive notwithstanding, also Article 57(1) of MiFID II literally requires the limits to be set "on the basis of all positions held by a person and those held on its behalf at an aggregate group level". How this provision could be interpreted to exclude sister companies? This can't be understood...
By the way, where a person has effective control of, but does not wholly own, a subsidiary (i.e. it has an ownership percentage of between 50% and 100%) ESMA proposes that the full amount of the relevant positions are aggregated, and not merely a percentage that reflects its proportion of ownership - but this rule is understandable for me.
There are, however, not so obvious situations requiring the increased level of attention. For instance, ESMA considers it is appropriate under particular circumstances to aggregate positions "even for unconnected persons where they are tied together in a common purpose".
The "common purpose" category seems sufficiently spacious, no one could feel entirely comfortable with new rules.
Every economic operator pursues a "common purpose" - to gain profit, I mean...
As a lawyer I also felt disappointed with the ultimate primacy of the economic sense of the given arrangement over its legal form.
This melancholy refers to ESMA's clearance that positions that are held by an intermediary on behalf of an end consumer do not count towards that intermediary's own position limits regardless of whether, for reasons of market practice, operational structure or legal framework, the positions are held by the intermediary as principal.
The above ESMA's interpretation may be welcomed by the market intermediaries, as it offers more freedom thereto, but, despite this, I dare to ask, is for the regulator any longer significant whether a party acts as a principal or as an agent?
The legal construct in both structures is quite different.
So, MiFID II - regulatory monster - really threatens...