AFME Welcomes Draft MiFIR report08.01.2022
The Association for Financial Markets in Europe (AFME) welcomes publication of the draft report by Rapporteur Danuta Hübner, which represents an important milestone in the legislative negotiations on the Markets in Financial Instruments Regulation (MiFIR) Review.
Adam Farkas, Chief Executive at AFME, said: “The MiFIR review and the proposals from Professor Hübner come at a critical moment. With Europe facing challenging times in light of slowing growth and rising inflation, in addition to the economic impact of the war in Ukraine, the efficient functioning of secondary markets is even more vital to meet Europe’s increasing private financing needs.
AFME welcomes today’s publication of the draft report by Rapporteur @danutahuebner, which represents an important milestone in the legislative negotiations on the Markets in Financial Instruments Regulation #MiFIR Review. Read here: https://t.co/7SunVhME2K
— AFME (@AFME_EU) July 29, 2022
“To ensure the continued functioning of these markets, the MiFIR Review must preserve the diversity of trading mechanisms serving different investor needs. Banks, as market makers, are an essential part of this ecosystem, committing their balance sheets to provide liquidity to financial markets. This intermediation is vital to help support market depth and liquidity throughout changing market conditions.
“Therefore, we would urge the Parliament to consider key issues affecting the competitiveness of European markets. For example, proposals which impose undue restrictions or expose committed bank liquidity providers to increased risk could have potentially damaging effects on secondary market liquidity and the competitiveness of European markets.
“Capital markets are global and we commend Professor Hübner’s approach of ensuring regulatory changes in other jurisdictions are taken into account in the development of the EU framework. Keeping these developments in mind will contribute to strengthening the competitiveness and efficiency of EU markets, ensuring that investors can access optimal trading conditions, which will ultimately benefit EU savers and pensioners.”
“We look forward to examining the draft report in further detail and engaging with the European Parliament over the coming months.”
In particular, AFME urges the Parliament to consider the following in its deliberations going forward on the MiFIR Review:
- In equities markets, AFME supports the suspension of the double volume cap, which will ensure EU capital markets remain competitive by bringing this part of the regulation into line with other jurisdictions.
- We also note that Professor Hübner has proposed an enhanced role for ESMA in establishing a size threshold for Systematic Internaliser (SI) trades that can be executed at midpoint, a minimum quoting size for SIs and a minimum size threshold for use of the reference price waiver by trading venues. AFME cautions that if these restrictions are introduced, it is vital that they are based on sound evidence relating to market quality (i.e. the efficiency of intraday and closing price formation) and the delivery of best execution outcomes for end investors. AFME believes that applying further, unnecessary restrictions to the SI regime will erode the level playing field and inhibit SIs’ efficient facilitation of trading for institutional investors. For example, we note that the EU is a global outlier in pursuing restrictions on midpoint execution.
- In fixed income markets, while a 4-week price and volume deferral for very large transactions is a step in the right direction, any changes to transparency thresholds and the timing of publication of trading data that have not been based off granular analysis using a comprehensive, accurate data set, risks exposing market-makers to undue risk. The fixed income transparency regime needs to be calibrated to allow these market makers (which are committed liquidity providers) to continue to be able to quote/trade in large sizes as well as in illiquid instruments. The calibration must provide sufficient time to market-makers to hedge or unwind their positions, both in a benign environment, as well as during periods of high market volatility. The level one text should set out the principles which need to be taken into account when determining these calibrations, but the calibration exercise itself, in our view, should be delegated to ESMA on the basis of a thorough impact assessment.
- Establishing a well-designed consolidated tape for equites and fixed income will promote more attractive and competitive capital markets in EU and contribute to reducing home country bias in the Union, where investors tend to prefer companies from their own Member State.
- AFME strongly supports the statement that it is essential that the equity tape contains real-time, pre-trade data. We encourage all co-legislators to be ambitious and include pre-trade data in the equities tape at the outset. Making real-time equity market data available to all investors will provide a single view of trading in Europe, which is key for creating a truly pan-European market.
- Similarly, a post-trade consolidated tape for bonds will provide all investors, regardless of resources or sophistication, with a comprehensive and standardised view of the European fixed income trading environment and will help attract international capital. It is, though, important to note that a bond consolidated tape will not solely address the issues of particularly high market data costs in this market.
- While the development of a fully-fledged consolidated tape would be a game-changer for the Capital Markets Union, its positive impact would be undermined if the other restrictions to the trading environment, highlighted above, are introduced as this will be to the detriment of investors.
- On the definition of SI and SI reporting requirements, it is important to reduce uncertainty when it comes to establishing who is registered as an SI and also who should take responsibility for post-trade reporting.
AFME supports proposals to introduce a designated reporter regime which will eliminate uncertainty around the question of which counterparty reports a trade for the purposes of fulfilling post-trade transparency requirements. Under the current regime, whish is based on SI designation, market participants have faced unnecessary complexity which has led to duplicative reporting.
The application of a qualitative definition for SIs will remove the existing, unnecessary quantitative definition which places an unnecessary burden on EU investment firms. Combined with the decoupling of the SI regime and reporting requirements, this will lead to a framework where firms only register as SIs when it is reflective of their business model. AFME supports this approach.
FESE endorses the guiding principles of the draft parliamentary report on the MiFIR review
FESE endorses the guiding principles of the draft parliamentary report on the MiFIR review – to reduce fragmentation, level the playing field between venues, bolster the EU’s international competitiveness, and promote retail participation. Such guiding principles need to be interpreted and implemented in the context of the specificities of a fragmented EU capital market with no single dominant financial centre. The solutions proposed, however, risk the integrity of the Capital Markets Union (CMU), would further deteriorate price formation and continue to fuel the concentration of equity trading among large players.
Primary exchanges play a major role in funding the EU economy thanks to their continued ability to run and maintain a full suite of operations, such as the strengthening of the price formation process (on which all market participants rely), the listing function, and the nurturing of SME growth markets.
Fragmentation can only be solved by a clean market structure, not via a tape
The Rapporteur, like the Commission, is correct to seek to address the fragmentation of EU markets. The consolidated tape (CT) project, however, is not the silver bullet, and must not distract from the core issue: the proliferation of Systematic Internaliser (SI) trading and a complexity and opaqueness of EU equity markets that with or without a tape only benefits a few players.
“It should be clear that the fundamental obstacle to less fragmented markets in Europe is the extent to which banks are able to internalise trading of smaller orders on their own books without taking risks,” said FESE Director General, Rainer Riess.
“Only a proper market structure which supports transparency and protects retail investors, can address fragmentation.”
The experience of the United States, which has a CT, demonstrates this, for example in the large portion of flows conducted via dark venues – a trend the US Securities and Exchange Commission, in its latest reform plans, is rightly looking to counter. More than fifty years after the setup of its CT, the US market shows that this database in and of itself cannot address the issues of liquidity fragmentation. Market structure reforms, which support transparency and protect retail investors, are the answer to fragmentation.
FESE has consistently argued that limiting SI trading to large orders, to ensure protection from market impact, would be an efficient and relatively straightforward way to address the current causes of fragmentation whilst also incentivising lit trading and safeguarding the quality and robustness of price formation. Collectively these measures protect retail investors and reduce potential conflicts of interest, such as payment for order flow.
Europe with a fragmented tape?
A CT would be an important step forward and exchanges support this initiative. Guaranteeing a transparent, high-quality, reliable and consistent view of 100% of the market activity will be key to the effective functioning of European capital markets and the ability of investors to verify best execution.
Exchanges have, however, been warning for some time about the potential threat of a realtime CT to the viability of smaller exchanges. Rapporteur Hübner seems similarly concerned, as the report contains a proposal to exempt smaller markets from mandatory contributions to the tape. Such a proposal risks introducing further fragmentation into the EU market, impeding the development of a fully functioning CMU which can serve issuers and investors alike, and creating a two-tier market structure in the EU. Instead of delivering a consolidated view, it would further fragment EU markets. The proposal to include an opt-in option for the exemptible venues would lead to possible discrimination, which would in turn increase fragmentation and counter the idea of presenting a consolidated view of 100% of trading.
The suggested inclusion of pre-trade data – information before a trade is completed – would, due to any latency on the feed, create an illusory view of the market, susceptible to exploitation by more sophisticated players.
The Chair and CEO of the Prague Stock Exchange, and FESE President, Petr Koblic, commented:
“A pre-trade tape brings with it a litany of risks – for instance arbitrage by institutional investors, a distorted reference price, etc. – which leaves retail investors worse off.”
“High-quality exchange data is readily available at reasonable prices which is already consolidated via many vendors. Instead of focussing on a largely tangential debate over the CT, we need to focus on what really matters: securing a market structure which preserves and enhances transparency, delivers for issuers and investors alike and which strengthens EU strategic autonomy and its ability to compete internationally.”
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