Regulation, regulation, regulation!

Anne PlestedAs market participants are still reeling from the attack on HFT and technological innovation in the latest draft amendments to MiFID II, let’s take a look at the rapporteur Markus Ferber’s draft changes to the proposed MiFIR EU regulation.

The biggest change is that the OTF category, previously proposed in an attempt to regulate OTC trading on broker crossing systems, now looks to be only for non-equities – think on a par with SEFs in the US.

The amended version of MiFIR retains its emphasis on ensuring that as much OTC trading as possible is transacted on organised systems, with appropriate transparency in place, but using the existing MiFID execution venue types for equities. OTC equities trading will be pushed onto exchange, MTF or SI. The definition of an SI is strengthened but is by no means clear!

On opening up EU competition the intended boost in the derivatives clearing arena, whereby trading venues will be obliged to provide access and data feeds in a non-discriminatory way to CCPs that wish to clear their trades, stops short of introducing interoperability. In fact the amended text explicitly states that “…this should not lead to interoperability for derivatives or create liquidity fragmentation…”. The very notion of liquidity fragmentation is to be specified in regulatory technical standards. There seems to be a lot less enthusiasm for derivatives fragmentation given the consequences introduced for equities in the good old MiFID days!

There is a nod to the importance of due consultation as all the details of the regulatory technical standards are worked out. So ESMA is listening but to what avail?

The contentious Article 7 still stands unchanged with non-equity trading venues obliged to publish prices and depth. A subtle change to Article 8 for non-equities even removes the possibility of competent authorities to waive the obligation for pre-trade transparency for a non-equity OTF; so there will be no dark trading in non-equities outside of regulated markets and MTFs. Interesting, as deferred post-trade publication for an OTF is still in there.

There are new obligations under Article 13a “to trade OTC through systematic internalisers”; all equity transactions which are not intragroup or traded on exchange/MTF must be concluded through an SI (apart from new issues). Existing operators of broker crossing systems will therefore need to consider either becoming an MTF, with the possibility of a pre-trade transparency waiver but with the accompanying regulatory, operational and surveillance overheads, or becoming an SI with the obligation to publish continuous firm quotes for liquid stocks. The class to which an instrument belongs, which will in part determine what an SI has to publish in its quotes, will be set by ESMA and published on their website.

The timeline for the regulation to apply now says after 18 months (rather than 2 years) from the entry into force of MiFIR (agreement of the Level One text and publication into the EU official journal) expected to be in line with MiFID in 2015, although some articles will still apply immediately which, by my calculation, could be by end of 2013.

3 Responses to “Regulation, regulation, regulation!”
  1. Anne says:

    This week Cheuvreaux’s new Blink dark pool MTF received approval from the FSA to convert from a broker-crossing network to a multilateral trading facility. Their goal is to provide institutional clients a haven from big bank proprietary desks and high frequency traders.

  2. Christian Voigt says:

    I wonder what happens to Cheuvreaux’s BCN? Do they really transfer all their business into the new MTF? They might operate BCN and MTF in parallel and see what clients will choose.

  3. Anne says:

    Possibly, though the article says ‘convert’ and we had expected equity BCN’s to either be pushed to operate as an SI or MTF; this looks like a first example of this shift in market structure.

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