07.10.2012
By Terry Flanagan

U.K. Lawmakers and Market Experts Urge Caution on MiFID II Reforms

The U.K.’s House of Lords has become the latest body to cast doubt on proposed changes to the European Union’s updated Markets in Financial Instruments Directive (MiFID II).

The U.K. parliament’s unelected upper chamber, in a report published today, believes that Brussels’ attempts to tighten up financial regulation in Europe in the wake of the 2007 original, which harmonized regulation and increased competition and transparency across many EU markets, are misguided and will potentially cause great damage to the City of London and other European markets.

Last week, European parliamentarians on the Economics and Monetary Affairs Committee (Econ) postponed a vote on MiFID II due to political wranglings, which, it has been reported, will now take place on September 26.

“We are very concerned that the undue haste with which MiFID II has been brought forward means that the [European] Commission simply hasn’t had time to think through the implications of its proposals,” said Lord Harrison, who chairs the EU economic and financial affairs and international trade sub-committee in the upper house that published the report.

“The consequences of ill-thought-out legislation, not only for the City [of London] and the EU financial sector, but for consumers of investment services throughout the EU, could be hugely damaging.

“While we absolutely agree that a review of MiFID I was needed, we simply can’t risk locking third country firms out of EU financial markets or damaging the provision of investment services. It is vital that the U.K. government, the Commission, Council [of the European Union] and European parliament ensure that, rather than being bounced into these changes, all steps necessary are taken to ensure that MiFID II is fit for purpose before it comes into force.”

The report stated that proposals on third country access would effectively create a “fortress Europe”, forcing the U.S. and China out of affected markets to the detriment of EU consumers. It also said that although a push for greater transparency was welcomed, an unsophisticated “one-size-fits-all” to less liquid bond markets that ignores the sensitivity of information before a trade is made not only risks damaging liquidity and reducing competition, but could also have a serious effect on market innovation.

While the report also said that the proposed new category of trading venue, an organized trading facility (OTF), aimed at ensuring all organized trading is conducted on regulated venues, risks creating red tape through an overly complicated regulatory framework.

In addition, the House of Lords report flagged up worries over Brussels’ assault on high-frequency trading. It said that further research was needed to “determine with any certainty the impact of high-frequency trading on financial markets and on the economy as a whole”.

A number of practitioners and experts in the operation of financial markets were invited to the House of Lords committee to highlight their concerns over MiFID II and its potential consequences.

Thierry Philipponnat, secretary-general of Finance Watch, a Brussels-based lobby group set up last year to act as a counterweight to the financial industry lobby, warned of the dangers of making the legislation too prescriptive. “If we try to get into the detail of every single product we can be assured that we will miss the next product invented one or two years down the road,” he said. Philipponnat also warned that a MiFID III was inevitable.

While Professor Niamh Moloney from the department of law at the London School of Economics said that although MiFID II was broadly a good measure, “the lesson from MiFID I is that whatever the market looks like in five years’ time will not be what people thought in drafting MiFID II”.

Professor Emilios Avgouleas, chair in international banking, law and finance at the University of Edinburgh concurred, saying that regulation will always lag behind market developments, because “clever people will find more ways to trade more effectively, with lower margins and at a profit”. Avgouleas advocated a system based on general principles rather than to regulate the micro-structure of the market.

There are many contentious issues in MiFID II that have still yet to be decided upon in Brussels including market structure issues such as the creation OTFs, curbs on dark pools and pre-trade transparency waivers; as well as measures to limit high-frequency trading and position limits on commodities trading.

Markus Ferber, a German center-right MEP and member of Econ, who is responsible for guiding MiFID II through the European parliament, has set a strict timeline for pushing the proposals through Brussels. The European Commission announced the draft law on MiFID II, which is being split into a directive and regulation, in October last year, and since then it has remained before parliament awaiting approval. It also needs the Council of the European Union’s blessing before it can become law. MiFID II had been penciled in to be introduced by 2015 although this new delay could push things back.

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