And the winner is … a compromise!

Whoever said the political processes to formulate MiFID II and MiFIR were complicated and boring? Look at it from the right angle and it can be every bit as exciting as the knockout rounds of a FIFA World Cup tournament. In the World Cup football teams compete against each other and only the winner progresses. The last team remaining in the competition takes home the trophy. Politics, however, is a competition of ideas and proposals.

There are multiple versions of MiFID II and MiFIR that have to be agreed on by the politicians. One vote will be by the ECON Committee on 26th September when they discuss the Ferber Report (on MiFiD II and MiFIR) and a second set of texts containing over 2,000 proposed amendments by MEPs. Once the ECON Committee can agree on a final version, the next round of talks will begin with that version being discussed together with the version from the Council of the European Union. The Council itself has not been idle in the last couple of months and has already prepared its own views. Recently it published the second draft of the Presidency compromise on MiFID II and MiFIR.

Unlike football, no one political ‘team’ wins. Instead, a compromise between the different teams’ texts is reached. Let’s take a look at a few highlights of the latest MiFID II Presidency compromise:

Scope of MiFID: In the first version of the Presidency compromise, HFT firms were able to avoid regulation through MiFID II by not becoming exchange members and by accessing markets only indirectly. That has been changed. In Art 2(1)d(ii) of the latest version it explicitly states that all high frequency algorithmic trading strategies are covered by MiFID II.

Market Interlinkage: Art 32(2) and Art 53(2) state that all markets have to follow any other regulated market, MTF or OTF if it chooses to suspend or remove an instrument because of market abuse, a take-over bid or the non-disclosure of inside information about the issuer or financial instrument.

Market Making Schemes: Arts 17 and 51 mandate that regulated markets must have binding market making schemes in place. Those market making schemes should require liquidity providers to quote continuously unless there are exceptional circumstances (to be defined by ESMA). This is quite powerful, because many electronic liquidity providers have already joined the exchange schemes in order qualify for the market maker exemption of the new European Short Selling Regulation.

The Presidency compromise for MiFIR contains the following highlights:

Pre-Trade Transparency: Arts 4 and 8 envision that for equities only the “large in scale waiver” and the “order management waiver” for pre-trade transparency will remain. All other waivers (most notably the “reference price waiver”) should only exist for a grace period after MiFID II enters into force and then will no longer apply. For non-equities there are many more waivers available that should address the needs of fixed income and derivatives. The latest draft spells out more details on how to determine a liquid market and how waivers can be granted for markets which are illiquid.

At the moment it is extremely difficult to predict the outcome of the negotiations but the final text will have some elements of the Presidency compromise, the Ferber report and the amendments tabled by the MEPs. In the World Cup of regulation it seems that team compromise will be lifting the trophy.

Comments
2 Responses to “And the winner is … a compromise!”
  1. Anne Plested says:

    Also worthy of note in the MiFIR document is the new article 26a – Mechanism to avoid duplicative or conflicting rules – which allows for EC assessment to take place at least annually of 3rd country equivalency of legal, supervisory and enforcement arrangements. Though according to ISDA (http://www2.isda.org/mifid/) this may not fully address the range of situations of conflict that could arise.

  2. Anne Plested says:

    The Council has published (19th September) the third draft of the Presidency text on MiFID II and MiFIR so getting ever closer to the final compromise.

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