Exchanges Respond to MiFID II Consultation

Terry Flanagan

Exchanges have highlighted transparency for derivatives and non-discriminatory access to central clearers as amongst their key concerns under proposed new trading regulations in Europe.

They have listed their concerns in comments letters to the European Securities and Markets Authority’s consultation paper on MiFID II which covers financial services in the region.

ICE said in its letter that Esma needs to properly distinguish between cash equities and derivatives which are completely different in their market characteristics and how they transmit risk.

“Esma’s proposed framework for transparency for derivatives is currently insufficiently graduated and does not take adequate account of the different liquidity profiles of instruments currently traded on regulated derivatives markets,” added ICE. “We accept that in this area Esma concedes that more work needs to be done.”

Deutsche Börse said that although it fully supports increasing transparency in the derivatives market, the current proposals will fail to achieve this aim. “Instead they would lead to a mid- to long-term reduction of transparency for exchange traded derivatives (already provided by exchanges today) and limit the potential for OTC derivatives to be traded on transparent multilateral trading platforms, which contradicts the G20 goals.” added the German exchange operator.

The German firm said the pre- and post-trade transparency thresholds need to be more sophisticated to accommodate exchange-traded derivatives.

ICE agreed that ensuring non-discriminatory access to clearing services is appropriate clearing a range of over-the-counter derivatives is mandatory but said that the current proposals oblige CCPs to assume risks irrespective of whether they can be mitigated. “It would be a perverse result of MiFID if non-discriminatory access led to a lowering of the high risk management standards that Emir did so much to establish,” added the US firm.

Deutsche Börse has a vertical clearing model like ICE, so that clients who trade on their platforms also have to use their clearing services, and also said that forcing access to CCPs will expose them to risk. “This runs contrary to Emir and the CPMI-IOSCO principles, which require CCPs to ensure that they are not exposed to unmitigated risk at all,” added Deutsche Börse’s letter.

In contrast Bats Chi-X Europe, the pan-European exchange which allows access to clearing by a number of firms, said it agreed with Esma’s proposals on demonstrating concrete examples of why an access request to a CCP should be denied.

“Trading venues/CCPS should have the ability to charge each other for specific access costs based on a clear and evidenced cost that has been or will be accrued as part of the negotiation between trading venue and CCP, however, any such costs must be applied without discrimination where the connection is for a comparable service,’ added the pan-European exchange. “Bats Chi-X Europe also agrees that this is a commercial discussion and not something to be prescribed.”

The London Stock Exchange Group also supported access to CCPs as competition will benefit investors and market users and said it was concerned that the proposals may allow denial of access too easily.

“We agree with Esma’s approach that access should be denied only if a significant undue risk remains after reasonable efforts are taken to manage it; It should not be possible for a CCP’s denial of access to be based on criteria that can be arbitrarily decided upon by the CCP itself,” added the UK exchange.

However LSEG also clarified that a CCP should always be entitled to deny requests to clear any product that it does not already clear.

Euronext said trading venues and CCPs should be able to deny access where an extraterritorial regime and/or a third country infrastructure does not meet European law requirements, particularly those imposed by Emir.

Asset managers have complained that the cost of market data in Europe is unnecessarily higher in Europe than in the US.

Deutsche Börse said it was concerned about legal risks for trading venues in Germany as they do not hold intellectual property rights in financial instrument reference data. The letter added: “In order to mitigate these risks, we propose to align the scope of reference data fields to a necessary standard set of data which can be made available free of charge on Esma’s s website and – in case of a substantiated need for additional data by the regulator – to establish separate license agreements for additional data.”

Nasdaq wrote that forced unbundling of market data packages will increase costs for venues as vendors would most likely just re-bundle the data. “Greater disaggregation will not only result in significantly higher costs in distributing market data, but it will also lead to confusion among investors who no longer can rely on receiving all the relevant market data,” added the letter.

The US exchange also considered that some of the requirements imposed under the proposed consolidated tape provider regime are too strict. “There should for instance be more flexibility around additional services that such providers are allowed to offer,“ added Nasdaq. “Otherwise, regulatory requirements risk discouraging candidates to such a regime.”

Featured image by jorisvo/Dollar Photo Club

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