It is about time

Last Friday, ESMA finally published its long anticipated call for evidence on periodic auctions. Periodic auctions became popular in 2017 and even more so through 2018 and so they are often linked to the introduction of MiFID II. While some opponents lambasted them as a cynical attempt to avoid the double volume cap, supporters have pointed out their innovative approach to fulfilling... Read More

Get it done, while you still can

When the double volume cap (DVC) was first enacted on 12th March it cut nearly half of dark turnover in Europe. After a 6-month mandatory break all of the suspended stocks have now been allowed to re-join the general population. Early evidence suggests that overall dark trading has now resumed at roughly pre-suspension levels. Our Top of the Blocks report shows that this resumption... Read More

Become a master of suspense

Starting October 1, 2018, CME Regulatory Advisory RA1720-5 comes into effect. The advisory details the limited use of suspense accounts, which are temporary holding accounts submitted at the time of order entry into Globex, but prior to the allocation of the executions to specific accounts on a carrying clearing member’s books. Only a de minimis use of general or non-customer... Read More

Is the DVC a ban in disguise?

If you had asked me last year what the actual impact of the double volume cap (DVC) would be, I would have said that it’s ridiculously complex to operate but wouldn’t matter all that much because it would likely only impact a few stocks. Seems I was wrong, judging by yesterday’s announcement from ESMA. Combining the statistics for January and February 2018, a total... Read More

Regulatory placebo effect

With great anticipation the industry awaits the announcement of the estimates for the double volume caps, now expected in March. Irrespective of the fact that ESMA has already missed one deadline, and with some in the industry waiting to see if there is any substance to a rumoured further delay, it’s evident that the looming caps have already impacted trading behaviour. The... Read More

Make room for some blocks

Block trading is unique as it enjoys rare bi-partisan support by practitioners and politicians alike. Unfortunately, relatively few people know how to navigate among block venues, due to their inherent opacity. To make matters worse, even fewer market participants command orders exceeding the Large in Scale (LIS) thresholds and decide to execute them in one go rather than put them... Read More

Sometimes it’s tough being average

Back in March the CME Group postponed the effective date of amendments to Rule 553 (“Average Price System”) until July 2, 2018 to allow sufficient time for affected Exchange Clearing Member Firms and CME Clearing to make the necessary changes to implement the rule. CME Rule 553 permits a clearing member firm to calculate an average price for trades via its own internally... Read More

The far reaches of reporting

Trade and transaction reporting rules under MiFID and EMIR can easily be confused, even though they have different requirements, different formats and, most importantly, different scopes. To recap, MiFID trade reporting is a short message to the public, intraday, for the purpose of price discovery; transaction reporting is a long message to the regulator, at the end of the day,... Read More

MiFID II – a catalyst for innovation

Trading in auctions – in contrast to continuous matching – has long been poised to grow under MiFID II, due to the technicalities in the pre-trade transparency regime and its waivers. With the go-live date edging ever-closer, the regulation has become a catalyst for innovation instead of being merely a cost of doing business. Exchanges are currently rolling out new and... Read More

Not all tails wag the dog

Modern atomic clocks tick along much more consistently than the earth manages to rotate around its own axis, which varies due to climatic and geological events. Thus, every so often the global masters of time insert a leap-second in order to align atomic clocks and earth rotation. Unlike changes in winter/summer-time, humans don’t really notice it. Even most software applications... Read More

Weighing up best-ex and best innovation

Competition amongst exchanges was a defining theme in MiFID I, but when it comes to best execution and trading venue fee structures, MiFID II might reverse some of that. MiFID II acknowledges that exchanges compete on fee structures and even establishes some basic rules (see RTS 10). But by tightening the bolts on best execution obligations, the new regulations can present conflicting... Read More

ESMA sheds light on dark trading caps

ESMA today published its first Q&A on MiFIR transparency topics which focuses on the double volume caps (DVCs) in equity markets and clarifies how markets can transition to the new DVC regime. The document outlines how to calculate the market share of non-transparent trading for instruments only coming in scope under MiFID II (think ETFs, for example). ESMA will make the assumption... Read More

The long and the short of it

MiFID II requires trading venues to store personally identifiable information (each potentially 50 characters long) relating to the traders, investment managers and clients of the orders they receive. While it might be very convenient for surveillance to have order book data married up with personal data, this requirement is not only an additional burden to system load but also... Read More

The ever-growing MiFID II shopping list

Amongst other things, MiFID II’s transparency reforms intend to clean up the quality of post-trade data and eradicate duplicate prints – long-suffered bugbears for investment firms. But in simply stating the rules, ESMA has left buy- and sell-sides puzzling over just how significant a change this is. A look at the cost benefit analysis the regulator published in September... Read More

Tumbling down the rabbit hole

With much of the MiFID II Level 2 text close to being finalised, the markets continue to dive even deeper into the details and home in on Level 3 material, such as the Q&As and ESMA guidelines. One such detail lies in the phrase “traded on a trading venue” which is used in MiFIR to define instrument scope for topics such as pre- and post-trade transparency, systematic... Read More

True innovation?

The recent slew of exchange announcements introducing new dark trading facilities in response to MiFID II would appear to suggest that the regulation has triggered a whole raft of innovations. But is that what’s really happening here? Euronext tells us it is planning to introduce a new liquidity discovery service building on its existing iceberg orders. Looking at the detail,... Read More

Light relief for dark pools – but for how long?

The dark pool debate has raged across the globe for some time now and, in every jurisdiction, it’s more often than not accompanied by a smattering of assumptions on almost everything and certain knowledge of almost nothing. Fair enough, in the absence of hard facts, the term dark pool doesn’t really instil a great deal of trust from the outside world. But this lack of... Read More

MiFID II’s catch-22

Under MiFID II trading venues are required to provide one of two options in order to support members’ testing efforts (RTS 7, Article 10). So exchanges can choose to offer either a realistic testing environment or a testing symbol. As testing can be terribly complicated, different views and opinions about which is better are to be heard across the market. On the one hand,... Read More

CFTC keeps source on the menu

Open commentary for Regulation AT is now officially over, and while the CFTC mulls over the mostly cautious responses there is some time to reflect on how best to prepare for enforcement of the rules. However, the loftiest piece of proposed legislation in the carte de jour isn’t about futures or traders at all, but the underlying source code of the systems associated with them,... Read More

In true MiFID style

The European Commission (EC) has published the first in a series of highly anticipated delegated acts, defining some of the crucial details for MiFID II. Most relevant in yesterday’s document is the unbundling of research and execution fees, where the EC has largely followed the advice given by ESMA back in December 2014. In true MiFID II style, a new acronym is introduced, each... Read More

A brief history of on/off-exchange

Hailed by legislators as the new framework to close loopholes, MiFID II will see OTC trading face new restrictions, most importantly in the form of the Systematic Internaliser (SI) and the new trading obligations. As the fog slowly lifts, it’s becoming apparent that these new restrictions could impact market structure in surprising ways. A more detailed analysis shows that... Read More

SMP checks in the balance

Self-match prevention (SMP) is offered by many exchanges – CME, ICE, Turquoise and BATS among them – and by the more advanced order management systems. In most cases, employing an SMP check is voluntary for trading firms; that is important because not every prevented self-match is also a prevented (illegal) wash trade. Some regulatory jurisdictions require intent as... Read More

And the MiFID II award for early guidance goes to…

Amidst the on-going rumblings about delays to MiFID II, and the budget and planning uncertainty this has created, it’s good to see that market participants continue to press on with implementation. MiFID II includes many new obligations for venues and, for investment firms, knowing what the exchanges will do fills a significant piece of the puzzle in their overall plan. Despite... Read More

Who watches the watchmen?

With much of the new financial regulation being passed and implementation for most of it in full swing, supervision is likely to gain more attention in the coming years. Since investment firms and infrastructure providers are largely supervised by national competent authorities, it raises the question who watches the watchmen? In ESMA’s 2016 work programme, the authority... Read More

A second chance for the SI?

Looking back at MiFID I, the Systematic Internaliser (SI) didn’t really take off, resulting in a meagre 1-2% market share in the FTSE 100 today. Many EU countries had different models to execute or internalise order flow, leaving the SI model on the shelf like a dented can of beans. Under MiFID II, Brussels will take a stricter approach by introducing quantitative SI thresholds... Read More

All together now…

A common approach will be key to minimising the fallout of MiFID II implementation, particularly around the extra data required for record keeping and transaction reporting and for algo identification. I’m hopeful that the ‘final’ Technical Standards due next month will have at least dropped requirements to include static data. Do we really need multiple systems storing... Read More

Best ex transparency moves to the next level

The draft technical standards for MiFID II require exchanges to publish quarterly execution quality reports (RTS 6). Sell-side firms are expected to digest these and update their best execution policies accordingly. Additionally, sell-sides must publish their own execution quality reports annually (RTS 7), which obviously should be digested by the buy-side. While sceptics might... Read More

Do you invest or do you execute?

Under MiFID II, both buy-side and sell-side firms are required to record and to report on, separately, the algorithms used in making both the investment decision and the execution decision. In most agency workflows that should be straightforward enough; the buy-side makes and reports the investment decision, and the sell-side is responsible for the execution decision. But how does... Read More

Fitting RFQs under MiFID II

With the extension of the MiFID II scope into non-equity asset classes and the tightening of transparency rules, firms relying on requests for quotes (RFQs) have to figure out how this fits under the new regime. Under MiFID I the regulator defined the market models that a trading venue can operate. With MiFID II this list has grown and now includes RFQs. Whether this venue-sponsored... Read More

MiFID II data disaggregation – be careful what you wish for!

Under MiFID II pre- and post-trade data is required to be made available in an unbundled fashion – ultimately the regulator is aiming to drive down data costs. So where trading venues sell their pre- and post-trade data in the same ‘package’ they will be required to also make it available separately at a reasonable cost. Setting aside the cost discussion, the whole... Read More

MiFID II set to cast its net worldwide

The current MiFID II draft suggests that trading venues have to fulfil the transaction reporting for non-EEA exchange members. While it is understandable that regulators want to ensure complete records of all trading activity within Europe, the operational burden could be far-reaching. Currently, exchanges rely largely on trading interfaces to collect information from their members,... Read More

Flagging on the road to transparency

With its aim of increasing transparency around execution quality, under the current draft technical standards MiFID II will require investment firms to provide an annual execution quality report that states, for the top five execution venues, the share of passive and aggressive orders executed by the broker. In many cases the exchange provides a passive/aggressive flag on the trade... Read More

ESMA stops short of a no-action letter

Having taken several years to get through the review of MiFID, it was interesting to hear from ESMA chair Steven Maijoor last week that there is an appetite to “explore the mechanisms to address regulatory adjustments in a flexible and agile manner”. Neither national authorities nor ESMA have any tool like the ‘no-action letter’ employed in the US. Given that the rules... Read More

Left in the dark

Currently, it doesn’t really matter whether dark trades are executed under the reference price waiver (RP), large in scale waiver (LIS) or a negotiated trade waiver (NT). However, under MiFID II, the waiver flavour will make a significant difference. Whilst RP and parts of NT will become subject to the clunky double volume cap, LIS will not, so we may expect to see an increase... Read More

Change is the only constant

The unbundling of payment for research is a top concern for the industry. There seems to be general acceptance that, one way or another, Europe is set on the soft dollar research market becoming a hard dollar one by January 2017. Despite calls for more clarity and the recent publication of the FCA discussion paper on the regime, opinion remains divided as to how the use of CSAs... Read More

On a quest for answers in Paris

Travelling to Paris today for tomorrow’s open hearing on MiFID II, the two issues I’ll be mulling over on the Eurostar will be record keeping for trading venues and transaction reporting. Both could potentially trigger significant changes in front and middle office workflows for many trading firms. At the core of my concerns lies the requirement for trading venues to... Read More

One step forward, one step back

Market making, at its core, is a simple exchange where the market maker gives immediate liquidity and takes the bid/ask spread in return. This is set to become much more complicated in MiFID II as ESMA is mandated to introduce market making obligations. Under ESMA’s latest draft investment firms using algorithmic trading for market making for at least 30% of the available trading... Read More

Return of the concentration rule

A long time ago in a galaxy far, far away… It is a period of calm, with primary exchanges enjoying relatively little competition thanks to concentration rules enforced in many EU countries requiring all equity business to be conducted on exchange. The arrival of a new disruptor, in the form of MiFID I, is about to turn their lives upside down forever. The blanket ban on concentration... Read More

Systematic Internaliser on a wire

MiFID II imposes simple categories on a complex trading landscape, such as on- and off-exchange, or multi-lateral vs. bi-lateral. Obviously having some rules helps unravel complexity, but too many kills innovation. Walking this tightrope is not easy. Internalisation comes in two flavours. Either you have an order from a customer, agree a fixed price and then try to unload the position... Read More

Stuck between a rock and a hard place

First proposed way back in 2011, work has been ongoing to narrow down the details of a common financial transaction tax (FTT) to be introduced across Europe. Back in May this year, all but one of the 11 member states keen to push ahead had agreed that by the end of 2014 it should all be worked out and the new tax phased in by the end of 2015. But according to the EU’s recent... Read More

Turning down the heat on dealing commission

As the FT reported earlier this week, ESMA is set to step back from imposing a much contested overhaul of dealing commission. The scrutiny of commissions has been a major concern for the buy-side, in particular ESMA’s proposals to classify all but the most generally available investment research as a non-monetary benefit. This effectively implies the ‘unbundling’... Read More

Refocusing on auctions

BATS Chi-X Europe recently announced plans to introduce opening and closing auctions for ETFs, while the LSE plans to introduce an intraday auction for all SETS equities. Although these moves differ in instrument scope, they seem to have a common aim. The buy-side has long complained about the increasing difficulties of executing large block trades. With the new double volume caps... Read More

Hedging swaps with futures: a thing of the past?

As the industry continues to speculate on the trajectory of the swaps market, what’s in store for the final package trade exemption expiring on November 15, 2014, when packages consisting of swaps against futures (so-called ‘invoice spreads’) must be traded on a SEF? The problem with invoice spreads is that the futures component (typically treasury note futures)... Read More

What I did not do

When I got into work this morning, I decided not to return a missed call, not to review a document, not to read a report, not to ask some colleagues for advice, not to fill in my timesheet for last month, not to think about further job training and, most importantly, not to join an internal weekly meeting which was covering a topic not relevant to me. Instead I decided to write... Read More

El mañana is here

Last week I was in the beautiful city of Madrid, where besides analysing the impact of upcoming MiFID II regulation, I’ve been catching up on the Spanish Market Reforms. The upcoming changes, aka La Reforma, promise to align the Spanish market with European peers and improve competitiveness. Spain’s clearing, settlement and registry system overhaul is being tackled in 2 phases,... Read More

Money Market Funds – what cost safety?

Tomorrow the SEC’s five member Commission is expected to vote on new changes to rules for money market funds (MMFs), but will the changes be safer or costlier? The two main changes will see ‘prime’ funds move to a floating NAV and boards permitted to impose redemption fees or even suspend redemptions on a temporary basis. This is all designed to make MMFs less... Read More

Tour de Force

The current MiFID II consultation is infamously complex, covering 800 pages and 800 questions to be answered in 8 weeks. If that in itself is not enough of a challenge, ESMA invited all market participants to Paris this week for a two-day Tour de Force, aka public hearing. Be it equity, non-equity, pre- or post-trade transparency, SIs, OTFs, trade reporting, third country regimes,... Read More

The long arm of the IRS

The effective date for the long-anticipated US FATCA (Foreign Account Tax Compliance Act) is here and the impact on investors’ pockets could be substantial. After today wallets may be a little lighter for those hit with the 30% withholding tax on their US sourced payments on things such as dividends, interest and insurance premiums. Even as the markets continue to stabilize and... Read More

Any port in a storm?

With the European Parliament’s formal adoption of MiFID II in yesterday’s plenary session, the next fundamental industry overhaul is on the horizon. Away from all the noise around HFT, I’ve been looking at the new trading obligation for investment firms that requires them to undertake all trades in shares on a regulated market or MTF, or as a systematic internaliser... Read More

What role for OTFs?

Last week the CFTC published another no-action letter with respect to trading swaps on a European MTF. At the heart of the discussion is the question of whether European MTFs can be considered as equivalent to US SEFs. Given that a number of banks within the scope of Dodd-Frank also need to trade swaps within Europe, this is an important issue. In Europe, the discussion around swaps... Read More

Keeping SEF doors open

The CFTC has come out strongly in defence of the open, impartial nature of SEFs, as envisioned by Dodd-Frank. In a letter issued last Thursday it warns SEFs not to use “enablement mechanisms” to control access to their markets, or to control which participants interact with one another on their platforms. It also warns against engaging in “prohibited discriminatory... Read More

A lose-lose situation?

There are currently 15 SEF applications lodged with the US CTFC at various stages of registration. With experience in other asset classes showing that while many new entrants may emerge only a few will succeed, many in the industry are wondering which of these new SEFs will make it beyond their first birthday. Even for those that do survive there’s no guarantee of a profitable... Read More

The buck stops here

Money markets were rocked in 2008 when the Reserve Primary Fund committed the unthinkable by ‘breaking the buck’ because of its links to Lehman Brothers. This served as a wake-up call and in 2010 the SEC implemented amendments to the 2a-7 regulations which safeguard these types of investments. But many in the industry said they didn’t go far enough and on June... Read More

UCITS V – the debate rumbles on

The European Parliament vote on amendments to the UCITS IV Directive has been delayed. UCITS V, as it will be known, covers three main themes: depositary functions, regulatory sanctions and remuneration requirements. It’s the latter that no one can agree on, with bonus payment caps proving particularly contentious. Sven Giegold, the European Parliament’s Rapporteur on... Read More

Buy-side steps up

With financial markets focused firmly on risk reduction – a key priority for the G20 – the buy-side is turning its attention to the issue of counterparty risk. This parallels well with the OTC clearing requirements set out in the Dodd-Frank Act. In a reaction to the perceived risk inherent in trading leveraged instruments without adequate safeguards, the regulators stepped... Read More

Swap your workflow

We’ve discussed the current course of regulatory change, specifically Dodd-Frank here in the States, and alluded to the “total set of changes the derivatives industry is going to go through”. But one thing is clear, the interrelationships between buy-sides, sell-sides (FCMs and swaps dealers, executing and clearing brokers) and CCPs is going to get increasingly... Read More

The long arm of the law

The buy-side has traditionally been spared from the burden of most regulatory trade reporting requirements, passing this responsibility on to their brokers who hold the exchange memberships. But this principle looks to have been challenged by BaFin, the German financial regulator, with the introduction of its High Frequency Trading Act. One of the aims of the law is to ensure that... Read More

Stop/start for Dodd-Frank’s swaps rules

The Dodd-Frank Act, nearly three years old this summer, continues its slow, inexorable pace of implementation. In some respects, the financial landscape has changed unequivocally; in others, the final results of change remain to be seen, as the industry awaits additional rulemaking. Most of the current regulatory milestones impact only participants in the OTC swaps markets, but... Read More

Consolidated tape – work continues

After endless discussions all over Europe, there is still massive confusion as to which European Consolidated Tape (ECT) model MiFID II will bring and when. Despite the uncertainty, the creation of a consolidated tape for equities remains firmly in the MiFID II text and on the buy-side’s wish-list. Behind the scenes of the ever-lengthening MiFID II timeline, and regardless of... Read More

MAD as a March hare

The reviews of the Market Abuse Directive (MAD II) and proposed EU Market Abuse Regulation (MAR) continue to run their course through the European trilogue process, with final Level 1 agreement expected to keep pace with the MiFID review spanning out into the second half of 2013. MAD II and MAR will bring increased obligations on firms, including criminal sanctions, in the event... Read More

La bozza del decreto

Italy’s Ministry of Economy and Finance published a draft of the decree for the Italian Financial Transaction Tax (FTT) just after the 31st January deadline imposed by the law (for an English translation visit our Raw material section). The decree sheds light on most of the dark corners left by the bill, detailing how charges are to be calculated, who is responsible for their... Read More

For every action, there is an equal and opposite reaction

ESMA recently published its Guidelines on ETFs and other UCITS issues. As their Chair, Steve Maiijoor, puts it “these comprehensive guidelines are aimed at strengthening investor protection and harmonising regulatory practices across this important EU fund sector”. At a high level here are the key provisions (plus some of my own comments): 1. UCITS ETFs must by identified... Read More

Block Trade: Endangered species or old habit?

Currently, MiFID favours block trades by granting them privileges that regular sized trades do not receive. A block trade between two institutional investors is treated rather like a Sumatran elephant that is way up on the red list of threatened species. Regulators protect block trades by allowing for pre-trade transparency waiver and delayed post-trade reporting. At the other... Read More

Self-test – am I a HFT strategy?

The European Parliament has issued its rapporteur report for MiFID II, as discussed in The Rapporteur’s Story and Should have gone to Specsavers! The current proposal includes a definition of high-frequency trading strategy. Furthermore, it proposes to regulate HFTs more strictly. That scared me a little bit. After all, I do some trading in my spare time so I followed the definition... Read More

… and now to the final chapters

The latest in my series of PMQs looks at further convergence of the regulatory framework and supervisory practices, covered in the final two chapters of the EC’s Public Consultation paper on the Review of MiFID. The EC is tightening up on supervision, fines and penalties and is looking to introduce a program of whistle-blowing schemes. There will be nowhere to hide and, if... Read More

Caveat emptor

The next in my series of PMQs looks at Investor Protection and Provision of Investment Services, covered in the EC’s Public Consultation paper on the Review of MiFID. Regulators and market participants have raised concerns about investor protection and the EC is considering revisions in this area. Have you been sold unsuitable investments? Do you fully appreciate the risks... Read More

Do you GoCompare or are you Confused.com?

The Regulation team has great pleasure in bringing you a unique (and somewhat ironic) insight from Robin Strong, Head of Buy-side Market Strategy at Fidessa, in his paper entitled Do you GoCompare or are you Confused.com? One of the most topical issues from the point of view of both politicians and industry practitioners relates to the role of derivatives and fixed income. Robin... Read More

It’s not all about you!

I came across an interesting report published by the European Capital Markets Institute (ECMI) and CFA Institute entitled Restoring Investor Confidence in European Capital Markets. This piece of research is intended to defend the position of the European retail investor. One of the key points ECMI makes is that the initial MiFID legislation hasn’t benefited the end investor.... Read More

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