Europe’s Exchanges Demand MiFID Changes

Terry Flanagan

Some of Europe’s major exchanges are calling for regulators to iron out inconsistencies in proposed changes to the MiFID update.

The revised Markets In Financial Instruments Directive (MiFID), which is currently rumbling through the European Union, is causing angst for many of the region’s bourses if some of the current proposals are set in stone.

One of the contentious issues involves the European Commission’s proposed introduction of organized trading facilities.

The Federation of European Securities Exchanges (Fese), which lobbies on behalf of 46 of the region’s exchanges including Deutsche Börse and NYSE Euronext, says plans to introduce a new regulatory definition for an exchange—with its new rules—to sit alongside regulated markets and multilateral trading facilities will, Fese says, distort the playing field.

Fese wants to see all over-the-counter (OTC) derivatives traded on regulated markets and multilateral trading venues, much like equities have done since the introduction of the original MiFID in 2007.

However, critics say that these exchanges only want to get their hands on some of the riches associated with the $700 trillion global OTC derivatives market. The G20 group of nations aims to have all derivatives pushed on to exchanges and cleared by a central counterparty by the end of this year, to safeguard the financial system against large defaults.

“According to the current MiFID, the protections to be provided by all trading venues are pre- and post-trade transparency, non-discretionary execution, open and fair access and market surveillance,” said Judith Hardt, secretary-general of Fese.

“These market-facing protections are important and should apply whenever a trade is crossed multilaterally. Exchanges are critical of the organized trading facility proposals because brokers running these multilateral venues would be able to avoid some of the rules, in particular non-discretionary execution.

“This would allow bank crossing networks to offer better outcomes to some of their clients. This will be one of the major fights in the European parliament in the coming months.”

With many in the industry fighting their own corner over the updated MiFID proposals, Fese says that finding a compromise solution is not the way to solve the issue.

“We firmly believe that the outcome needs to be stronger as the final legislation will determine the ground rules on how capital markets function in the real economy for the foreseeable future,” said Fese.

“We therefore think that the final legislation should be less complex, more concise and more ambitious than the Commission has currently proposed. Additionally, we strongly believe that the provisions of MiFID should be aligned with other legislation with which it might overlap [European Market Infrastructure Regulation, the revised Market Abuse Directive and Central Securities Depository legislation] and avoid any uncertainties or arbitrage among market participants, central couterparties and trading venues.”

Fese also has concerns over Commission plans over high-frequency trading and the “unintended consequences” of making all algorithmic traders, which includes many institutional investors, become market-makers.

It also says that the Commission’s proposals to oblige trading venues to introduce “U.S.-style position limits” may not suit all European markets, such as the commodity markets which, Fese says, already apply such methods under position management, delivery limits and lending guidance.

The European Commission, the EU’s executive, proposed the draft law, known as MiFID II, last year and it is now before parliament and EU states for approval, with implementation expected some time in 2014.

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