MiFID II ETD Regs Draw Fire

Terry Flanagan

The Federation of European Securities Exchanges said it was concerned that new regulations covering exchange-traded derivatives will reduce transparency.

In a comment letter to the European Securities and Markets Authority on MIFID II, FESE welcomed the introductions of more transparency in for over-the-counter derivatives. However the federation criticised attempts to specify liquidity thresholds for exchange-traded derivatives which it said already have high pre- and post-trade transparency and trade reporting which is close to real time.

The letter said: “In particular, FESE has serious concerns with the proposed large-in-scale thresholds. We would like to inform Esma that in many instances their proposals will actually result in a reduction in the current levels of transparency.”

FESE said the thresholds proposed for very liquid contracts were too low while those proposed for very illiquid contracts were too high.

“The result of the Esma proposal will be the move of liquid contracts from central order books and illiquid contracts from on-exchange trading altogether. The proposal is counterintuitive,” added the letter.

The federation also disagreed with the the average daily trading volumes thresholds for different classes of exchange-traded funds. “We would consider it to be more straightforward and simplistic to implement a single table with a single threshold and therefore support Esma’s alternative proposal because we consider this to be more closely aligned with the actual liquidity of ETFs,” said the letter.

FESE also said that bonds with lower issuance sizes should be included in the transparency framework in MiFID II. “The rise of electronic trading for bonds means that transactions will be smaller in size but also more numerous, thereby encouraging liquidity,” added the letter, “Indeed, the market impact of a transaction in a given bond is measured against its issuance size, i.e. the smaller the transaction, the less of the available tradable quantity is exchanged, the smaller the market impact.”

In 2014 FESE and FIX Trading Community said that Market Model Typology had become a FIX standard to allow standardisation in data from trading or trade reporting venues in an attempt to create a European consolidated post-trade tape. Bats Chi-X Europe was the first exchange to announce it would incorporate MMT last year and plans to make it compulsory for trade reporting in the second half of this year.

FESE said that Esma’s proposals for reporting non-equity OTC trades might not be compatible with the MMT model.

“While this has been a very successful Industry Initiative with many market participants already having implemented those standard flags already in their data feeds, we need to point out that the suggestion by Esma might not be compatible with the MMT model for some asset classes,” said the letter.

The federation urged Esma to stick to the MMT model or some non-equity asset classes in order to harmonize standards across the European Union and to liaise with the MMT Group over this issue.
MiFID II will also introduce changes in the way asset managers pay for research. Esma has proposed that asset managers either pay for research from their own resources or make payments from a specific research account funded by a client. Last month the UK Financial Conduct Authority endorsed Esma’s new guidelines but also said it believed that commission sharing arrangements are not compatible with Esma’s new guidelines.

A survey by consultancy Tabb Group of 50 global heads of trading in January 2015 found that two-thirds expect their research payments to decrease due to proposed regulations with nearly 80% believing that smaller asset managers will face a greater disadvantage. The survey covered 44 long-only fund managers and seven hedge funds with €25.5 trillion in assets under management.
ConvergEx, the US broker, said in its comment letter to Esma that removing commission sharing arrangements under Mifid II will result in only the largest buy-side institutions being able to afford research.

“The use of CSAs in the United States and in the UK has been successful to date, and the EU would be prudent to implement a similar framework,” added ConvergEx. “To experiment with an untested hard dollar research market model will most likely harm the investment industry, local economies, the growth of valuable research, and most importantly, the investing public.”

Featured image via iStock

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