MiFID II Q&A on Trading Venues Being Prepared

Shanny Basar

The European Securities and Markets Authority is working on guidance on secondary markets under MiFID II, the regulations covering financial markets in the region from 2018, which includes clarifying the differences between new types of trading venues and the operation of the double volume cap.

Last week the UK Financial Conduct Authority published the minutes of the MiFID II Implementation Trade Association Roundtable that took place in August. The minutes said significant progress has been made on secondary markets including a discussion paper on the derivatives trading obligation and guidelines on trading halts and management bodies of regulated markets.

The UK regulator added that work was underway on Q&A from Esma on a variety of topics including the definition of a multilateral system, the differences between MTFs and OTFs, the double volume cap, the scope of transparency obligations and the quoting obligation for non-equity systematic internalizers. “Publication of Q&A on secondary market issues would start at some point after the summer,” said the minutes.

The minutes said that Esma and national regulators are listening to the industry about their main concerns. “For example, Esma was working hard on the interpretation of ‘traded on a trading venue’ and this work was seeking to take into account this has implications for several different provisions,” added the FCA.

Last week Hirander Misra, chief executive of GMEX Group, told Markets Media that the exchange and post-trade technology provider is preparing for increased electrification and new types of trading venues when MiFID II comes into force.

Misra said: “As we saw with MiFID, the new regulations will lead to an increase in types of trading venues in Europe. There will be an increase in electronification such as with swap execution facilities in the US following Dodd-Frank”

MiFID II, covering financial markets, will come into force in the EU in 2018 and introduce a new category of trading venue, the organised trading facility (OTF) for non-equities, as well as changing how banks and brokers organise their trading operations, especially if they choose to operate as systematic internalizers with new pre-trade requirements across asset classes. In the US the Dodd-Frank reforms have led to a shift away from over-the-counter trading of certain derivatives which have been required to move to electronic SEFs as regulators have pushed to increase transparency.

Law firm Norton Rose Fulbright has said in a note on market structures: “It remains to be seen whether re-classification – of single dealer platforms, broker crossing networks, MTFs and third country platforms such as SEFs – will represent greater opportunity for flow, or impact the executable liquidity in non-equity markets. One thing is for certain – the complexity of quote-driven markets is about to increase.”

The law firm said the implementation of MiFID II will introduce auction systems competing with dealer pricing, as over-the-counter products will follow equities towards trading on venues and there will need to be sufficient liquidity.

“MiFID II will stimulate a high degree of trading process changes over the next several years, including multiple types of competing trading venues with the potential for order-driven and quote-driven models – If MTFs/OTFs will be suitable platforms for high-frequency trading in non-equities trading, volumes could increase in these products as a result of substitution,” added Norton Rose Fulbright.

Last month interdealer broker Tullett Prebon said it had partnered with GMEX Group to develop a hybrid voice and electronic trading platform for foreign exchange options through integrating GMEX’s request for quote technology with Tullett Prebon’s existing central limit order book capability. Misra predicts more hybrid models will launch as a result of MiFID II as banks will want to trade less liquid instruments more efficiently on an electronic venue but still need a voice component for certain trades, particularly block trades.

In addition the FCA said Marc Teasdale, director of market oversight, had taken over from David Lawton as the sponsor of its MiFID II implementation project and that Jennifer Long had taken up the role as accountable executive for the project.

The UK regulator added that it is continuing to develop the system  that will be used to receive and store transaction reports, commodity position reports and data for transparency calculations. “Preparatory work is being undertaken relating to the setting of position limits,” said the minutes.

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