MiFID II Trading Obligations And SI Regime Need Reform

Shanny Basar

It is most urgent for the European Commission to review the regulations relating to the trading obligations for shares and derivatives and parts of the systematic internaliser regime according to the European Forum of Securities Associations.

EFSA said in a letter: “In terms of priority, EFSA members would like to underline the need to review the rules relating to the trading obligations for shares and derivatives and parts of the SI-regime.”

MiFID II went live at the start of 2018 in the European Union.

The letter continued that both EU and third country regulators need to take the necessary equivalence decisions and/or reconsider the extraterritorial application of the rules to avoid market disruption resulting from the share trading obligation and the derivatives trading obligation. MiFID II requires certain shares and derivatives to be traded on an authorised venue in the EU.

In addition the rules should calibrate with respect to the levels of liquidity within the EU and make it difficult for investors to meet best execution requirements.

“EFSA members agree that the scope of the trading obligations should be narrowed down and balanced taking into account other policy priorities, such as the Capital Markets Union reform and maintaining the EU’s attractiveness as a listing location for issuers,” said the association.

Nausicaa Delfas, FCA

The share trading obligation has already caused a clash between the UK and the European Securities and Markets Authority. Esma initially announced that after the UK leaves the European Union, EU firms will have to trade certain shares and derivatives on EU or equivalent venues, even if most liquidity is currently in London.

Nausicaa Delfas, executive director of international at the UK Financial Conduct Authority, warned at the time that this would conflict with the UK’s own share trading obligation.

The European regulator subsequently revised the scope of its share trading obligation so that all UK shares can be traded in London, but there are still concerns about fragmentation as dual listed shares will have to be traded in the European Union.

Tick sizes for SIs

EFSA members remain concerned by the new amendments to the tick-size regime for systematic internalisers. MiFID II banned broker crossing networks and required broker-dealers to set up systematic internalisers in order to provide principal liquidity to clients.

“The application of the tick size regime above large in scale (other than trades executed at mid-point) will in our view not contribute to the price discovery process for LIS trades and may actually inhibit appropriate price formation between systematic internalisers and their clients,” added the letter. “Furthermore, the ability to execute large in scale trades on a sub-tick basis provides meaningful price improvement for clients trading in large sizes which brings benefits to end investors.”

EFSA recommended that tick sizes should not apply to any transactions that are above the LIS threshold and that for all order sizes, the mid-point should remain a valid execution price permitted to trade at a half tick, both on trading venues and with systematic internalisers.


MiFID II introduced new reporting requirements in order to increase transparency. The letter said the quality of market data needs to be improved – especially in terms of completeness of data, classification on financial instruments and liquidity assessment.

A number of firms have opted to become systematic internalisers in order to shoulder reporting responsibility for their clients.

“EFSA notes that an inability to trade report is a barrier to entry for new entrants and could result in suboptimal outcomes for end investors,” said the letter. “Investment firms’ institutional clients (buyside) currently feel compelled to transact with systematic internalisers to ensure their reporting requirements are met (in the frequent case they have not built their own reporting capabilities).”

Consolidated tape

EFSA members welcomed the Commission’s ongoing work for a properly constructed consolidated tape.

“However, we want to underline that a CTP is not a solution to the problems of poor data quality or the conceptual flaws and insufficient enforcement of the “reasonable commercial basis” provisions,” added the letter. “Moreover, it important that the establishment of a CTP and its pricing structure do not increase costs of market data even further.”

Market data costs

MiFID II said market data must be offered on a reasonable commercial basis but the letter said the rising cost is a significant issue for market participants in the EU. The role of data venders should be given a higher level of regulatory attention according to the association.

“Since investment firms are, in effect, forced to purchase market data from each of the trading venues, and since there are no alternatives, in most cases, to the data generated by each venue, there is very little or no competition, and the prices keep rising,” said EFSA.

As a result, the cost hinders the development of market data services, hampers competition and distorts the development of efficient capital markets.

Tim Cave, analyst at Tabb Group, included the consolidated tape and market data in his 10 topics to watch in EU equity market structure this year.

Cave wrote that the timeframes for a consolidated tape is uncertain.

“The real question lies in how to share any revenues from the tape back to the venues to make it economically attractive for a consolidated tape operator,” he wrote. “The Commission may issue an RFP for potential consolidated tape providers later this year, with a go-live date some time in 2021 at the earliest.”

Consolidation and partnerships

Tim Cave, Tabb Group

Cave continued that anemic trading volumes, political and regulatory uncertainty, and the impact of MiFID II led several brokerages and market makers to exit or consolidate their European cash equities franchises last year including Deutsche Bank, IMC, and Macquarie.

“This is a trend that will likely continue in 2020, and do not be surprised if another tier one investment bank or market-maker decides to downscale its European equities franchise this year,” he added.

An alternative for  maintaining a presence in equities would be enter into a partnership.

“We have seen execution partnerships between banks and electronic liquidity providers in non-equity asset classes, and these deals may make their way into European equities this year,” said Cave.

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