U.K. Firms Weigh In on MiFID

Terry Flanagan

Banks and hedge funds respond to European Parliament’s consultation.

Capital markets firms in the U.K. are weighing in on the revision of Markets in Financial Instruments Directive (MiFID), expressing views on such controversial issues as extraterritoriality, internalization, and market-making obligations for algorithmic traders.

In November 2011, the European Parliament launched a consultation on Markets in Financial Instruments Directive/Regulation (MiFID/MiFIR), or MiFID II, one month after the legislation was unveiled by the European Commission. The responses were due by Jan. 13, 2012.

MiFID II delegates powers to the European Securities and Markets Authority to allow third country (e.g., non-EU) firms to operate in the EU without setting up a branch in the EU, provided that the third country provides access to EU-based firms on a reciprocal or “equivalent” basis.

The British Bankers’ Association, in response to the consultation, said that  in order to maintain the openness and attractiveness of EU markets to international investors and issuers, there should be no condition of reciprocal recognition.

The BBA also said that national regimes should continue at least until an equivalence decision has been made for any particular country.

“The process will be complex, and rigid deadlines, even with a four-year transitional period, risk disrupting essential, legitimate and well-regulated interactions,” the BBA said.

In order to overcome the existing fragmentation and to ensure a level playing field in the EU for third country players, MiFID Ii proposes a harmonized third country equivalence regime for the access of third country investment firms and market operators in the EU.

The equivalency test will replace the U.K.’s existing regulatory exemptions for overseas financial firms, and hence threaten their ability to access the U.K.

“Despite the U.K.’s fear that the ‘Fortress Europe’ approach may be potentially damaging to the functioning of global markets, the European Commission seems set on these third country rules,” said a report by SNR Denton LLC.

MiFID II imposes market-making obligations on firms that employ high-frequency or algorithmic trading strategies.

The Alternative Investment Management Association said such requirements were “draconian and inequitable. If a market is in the process of a crash, why should some traders be mandated to continue trading while others may withdraw simply on the basis that the former make use of a computer algorithm?”

MiFID II would also prohibit operators of broker crossing networks from trading for their own account against order flow on those networks, known as organized trading facilities (OTFs).

Under the directive, OTF operators under MiFID may not execute any transactions against their own capital [as systematic internalizers or SIs] but will have discretion over how a transaction will be executed and may restrict access to clients with whom they don’t want to trade.

The BBA strongly objects to this provision.

“There is a need to allow the operator of an OTF to deploy its own capital, because clients seek to use the dealer’s balance sheet when they engage bilaterally,” said the BBA.

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