FIA EPTA Comments on MiFID II Review Proposals
The MiFIR/MiFID II Review proposals come at a critical time as the EU economy is recovering from the Covid-19 pandemic and while there is an urgent need to strengthen and further integrate European capital markets post-Brexit.
FIA EPTA believes there are three key areas where concrete and ambitious policy action is required to ensure that European capital markets can make a greater contribution to the EU economy and the well-being of its citizens:
- Building a true EU single market for financial instruments – for which the realisation of a properly designed and executed Consolidated Tape for equities, bonds and derivatives will be critical;
- Massively improving data quality and transparency in European equities, bonds and derivatives markets, so that end-investors can make better informed trading decisions as the price formation process is improved and search costs are lowered;
- Strengthening investor protection standards, so that retail investors can have justified trust in their intermediaries not to be exposed to corrosive conflicts of interest or suboptimal order execution in non-competitive markets. Banning Payment for order flow (PFOF) practices as they are currently observed in various EU markets are essential for this.
FIA EPTA very much applauds the Commission’s proposals for prioritising these three areas as well. We welcome the direction of travel of today’s proposals, while still seeing definite room for further improvements. We look forward to working closely with other market participants and with public authorities to realise an updated EU markets rulebook that does justice to these imperatives.
Three topics in particular need ambitious policy action 👇 pic.twitter.com/gb6j4Tt9C2
— FIA EPTA (@FIAEPTA) November 26, 2021
Piebe Teeboom, Secretary General of FIA EPTA commented on the Consolidated Tape proposal:
- We strongly support the creation of a European Consolidated Tape. It will be important that the tape for the three assets classes (equities, bonds, derivatives) will be executed in parallel. The need for a CT in bonds and derivatives is such that we cannot sequence these behind an equities tape.
- The Consolidated Tape will help to democratise European capital markets and empower end-investors to be in charge of their own destiny as they navigate the various execution options available to them. The CT will be a big improvement not just for the buy-side but to all market participants who stand to benefit from more integrated, efficient and transparent markets.
- It will be critical for co-legislators to keep the manifest benefits of the CT for EU markets as a whole, and for end-investors in particular, foremost in their minds as they review the Commission’s proposals. This is the time to act decisively and ambitiously in the interest of building a true and democratised EU single market for financial instruments — which aim should never be subordinated to the specific commercial interests of any single industry sector.
- The proposed scope of the derivatives tape is unduly narrow and FIA EPTA will advocate for an all-encompassing derivatives CT to match equally comprehensive equities and bonds tapes.
Piebe Teeboom, Secretary General of FIA EPTA commented on the bond market transparency proposals:
- Building a CT does not make sense without also significantly improving the quality of the data. Nowhere is this more needed that for post-trade transparency data in the EU bonds markets, as current MiFIR post-trade transparency information in bonds is of no practical value with weeks-long deferrals.
- FIA EPTA welcomes the Commission’s proposal to harmonise the deferral regime to ensure a level playing field while at the same shortening the publication delays for post-trade transparency information.
- However, the proposal risks creating a highly complex and overly conservative regime with differently defined deferrals ranging from 15 minutes to two weeks.
- Based on market experience, in particular with the long-standing post-trade transparency regimes in the US, a 15 minutes deferral would be an appropriate length. This will also be the case for large-size transactions when jointly implemented with an effective volume masking regime, ensuring that liquidity providers are not exposed to undue risk and are still able to effectively hedge even after the deferral window has expired since the market does not know the full-size of the large trade.
Piebe Teeboom, Secretary General of FIA EPTA commented on the proposed ban on Payment for order flow (PFOF)
- We welcome the Commission’s intention to ban payment for order flow (PFOF) practices in the EU but are concerned that the proposal as currently drafted will be ineffective as it still leaves huge gaps regarding what is considered as PFOF, how it is practiced, and between whom.
- It will be critical to close the loopholes contained in the proposal which would otherwise still allow PFOF practices that currently occur in various guises in the EU. In FIA EPTA’s view these practices, which are observed in some Member States, constitute an inappropriate conflict of interest which undermines fair competition between market participants as well as best execution for end-clients. These practices undercut EU investor protection standards and ultimately risk to disadvantage and, in due course drive away, the very retail investors whose participation in European capital markets will be critical to their success.
- Therefore, FIA EPTA will advocate for a broad PFOF ban encompassing all direct and indirect monetary and non-monetary inducements, and including all possible execution and routing scenarios between investment firms and all types of third-parties, including trading venues.
Source: FIA EPTA
Some material changes have come out of ESMA’s review of algorithmic trading.
A consolidated tape will significantly improve transparency and create a level playing field.
AFME said there should be mandatory free data contribution to the consolidated tape.
The review is an opportunity to recalibrate MiFID II regulations post-Brexit.
Regulatory reporting is an important part of MiFID II.