Association of Financial Markets in Europe: MiFID Symposium – Keynote Address

Los Angeles

Good morning and many thanks to AFME for inviting me here to speak today.

You’ve already had Elisa’ insight for that comprehensive summary of the steering group’s experience of MiFID so far. As someone who was involved for almost 7 years in the writing of this legislation, the feedback that we received from industry post implementation - whilst not always the most flattering - is vital. This is why events like today are so important and useful for me as a policy maker. I’m also very much looking forward to listening to Peter’s presentation next, where he will be setting out some of the challenges those in the MiFID world face in light of Brexit. Just in case MiFID hadn’t given you its fair share of challenges already. *********** I’d like to start my remarks today by putting MiFID2 into some context. My introduction to this mammoth piece of legislation was thoroughly French. In 2009 Christine Lagarde, in her role as French Finance Minister, commissioned three reports. A first report on the volatility in the oil markets, a second on equity market structure and a third on specialised SME growth markets (my personal favourite). So effective were these piece of work, that they went on to form much of the review that we know today as MiFID II.

Although in part neutered by my Own Initiative Report on Dark Trading and the UK foresight Project on HFT which were direct consequences of the French report.

I’m not sure I can be so kind about the recent positions the French have put forward on MiFID and other dossiers - but more of that later. The original MiFID1 demonstrated the value of a competitive landscape for equities and the aim of MiFID2 was to ensure that all asset classes could benefit in the same way. This wasn’t a crisis piece of legislation and the key aims of effective, competitive and fair markets were consistent with other pieces of market reform legislation of that time. The Market Abuse regulation and the CSD regulation for settlement were also key parts of the single market framework for financial services not born out of the crisis but predating it - unlike the EMIR rules for derivatives. All, like MiFID, saw transparency, a level playing field and increased investor protection as the best way to improve the EUs single market in financial services. So those were the aims. You will then remember, probably as well as I do, the political debates that followed. The Commission’s idea for the new organised trading facility OTF, the framework for pre and post trade transparency, resting and holding periods for High frequency trading  after we discussed an all-out ban on HJFT and algos and of course the debate around position limits in the commodity markets - A hugely political topic with food prices and raw material costs set against oil traders and energy firms. And countless other areas of contention, that we worked through to find common political ground. ****************** And here we are today, six months past implementation - with that implementation date itself delayed by one year. The delay, as political as anything I’ve mentioned above, introduced for a number of reasons  but mainly to give regulators more time to prepare due to the length of the legislation for one, its’ near 7,000 pages in length. The amount of time it took for some of the technical rules to be worked out and published. And the need for ESMA to build a completely new IT system in FERD. And yet despite these reasons, all of which seem entirely valid and legitimate to those in the room today, that one year implementation delay was one of the hardest things I have had to secure during my time as an MEP. Which is why, it was disappointing on January 3rd of this year to see the differing levels of implementation across the Member States, with 17 of the 28 failing to transpose MiFID2 onto their statue book and single market rules only applied fully in 11 Member States. Though I am happy to see that this has improved in the last 6 months. The initial reaction was fairly positive, especially when positioned against the many predictions of doom and gloom. As expected the impact seemed varied across the different asset classes and Member States. For certain actors in certain Member States the change was not as significant as it could have been. Financial advisors in the UK for example, already subject to RDR rules found the inducement terms more manageable than those based in Member States with no pre existing local requirements. For some it served as a catalyst for change - the fixed income players for example and the move from voice to electronic platforms where suitable. And like with industry implementation, there were also problems at a supervisory level, with issues around the Transaction Reporting Exchange Mechanism (TREM). With a dossier as comprehensive as MiFID 2, I was never under any illusion that things would slow down from a regulatory standpoint post implementation and with the 12th of March roll out of the double volume cap I don’t expect this to change anytime soon. As the data begins to be collected and analysed, as we begin to see the market adapt and practises like periodic auctions and new venues on the increase, policy makers will continue to take a very active role in this piece of legislation.

*********** In case that last point panicked any of you, let me be clear that “an active role” doesn’t mean that we are already working on another redraft.

But we are busy and we are engaged.

In light of this, I’d like to look briefly at the treatment of three issues that describe the sort of situations legislators in Brussels find themselves in now.

The first of these is the subject of SIs and in particular about them being outside of the tick size regime, a problem we were well aware of some time before implementation. Let me be clear, this goes against the clear intent of the legislation. Those asset managers justifying the use of an SI to satisfy best execution rules, simply due to a marginal price improvement within tick size, may find it is not enough over the long terms when full analysis looks at true best execution for clients.

Whilst all policy makers were in agreement on this point of inequality, the problem was how best to address this, as nobody wanted to reopen a Level 1 piece of text.

It has now been decided that the Investment Firms Review, under the stewardship of MiFID2 rapporteur Markus Ferber, will be the appropriate vehicle. You will all have seen his draft report and his Amendment 27, states that in order to ensure a “level playing field” SIs should be subject to the tick size regime, no matter the size of the deal. I expect this point to endure and remain a part of the Parliaments position moving forward. You can draw a comparison here.

Whilst you in industry have had to adapt your existing systems to MiFID2, law makers have faced the same problem. In Brussels we too are confined by legacy systems that do not always offer an easy solution.

Where a technical issue arises post implementation that you perceive could be solved through a quick technical fix, the nature of legislation always adds complications. A frustrating reality for policy makers and industry alike.  although changes to RTS’s are possible, politically level 1 changes are much more fraught.

A second issue that raises an important point is ESMA’s interpretation of the ancillary activity exemption granted in Article 2.

Many of you will have seen the letter ESMA sent to the Commission asking for further clarification as to the level at which these tests should be conducted, whether it should be at the group or an entity basis.

The existing view of the Parliament is that this should be at an entity level in keeping with the political intention behind the level 1 text and the treatment in the current RTS 20, yet to ESMA this is apparently not clear.

Just as firms in the audience have to ensure compliance, so to do policy makers. The involvement of different institutions and actors in the EU law making process, make it essential to ensure that the spirit of the level 1 text is understood and communicated in some of the later technical discussions. Much of my time is spent monitoring and trying to ensure this, not all of which is public.

ESMA do not participate in legislation and are tasked with subsequent rule making, care needs to be taken that these fully confirm to the political decisions already taken by the co-legislators.

The final point I’d like to raise is on a consolidated tape. I strongly believe that we need a significant amount of time after implementation before policy makers make a judgement on the legislations successes and failures.

We need time to collect, analyse and understand the extensive and detailed new data that is now at our disposal.

There are areas however that EU lawmakers monitor very closely, for me that is the continued absence of a consolidated tape across all asset classes.

It was always the intention to develop a free at the point of source consolidated tape that was available to al after a suitable time delay, similar to that which exists in the US markets.

MEPs saw huge value in a ‘democratisation of data’ and the creation of a resource that could be used by the buy side retail investors, academics, entrepreneurs in the FinTech space and ordinary citizens.

We had hoped that this would develop naturally as an evolution within the market but there was also an understanding that a legislative intervention could be required if this was not the case.

Supporting transparency for the end investor is key to MiFID and when policy makers do begin to move out of this stock taking period and look to the future – it is areas like this that I would expect to gain early attention and support.


Does this mean therefore that the Commission is already thinking about a MiFID3?

Let me clear, MiFID3 will not be MiFID2 mark 2.

Every piece of legislation that comes out of Brussels has a built in review period. If you look at the Capital Requirements Directive, we are now working on our fifth review, mandated so that technical changes can be made to keep capital regimes proportionate and up to date.

The numbering system for legislation in Brussels usually does not discriminate between minor technical tweaks and extensive reviews. However in this case I envisage technical amendments nowhere near to the same extent that you have just implemented.

Where then, and why, will these changes occur?

Firstly and logically Brexit will mean changes to certain thresholds across all asset classes. By removing the EU’s largest financial centre from the calculation, you are significantly changing the size and nature of the EU’s Capital Markets.

Thresholds that have been put in place to ensure transparency and open competition will then need to change to reflect this new normal.

Other changes may be less logical.

On my more cynical days, given how highly political the post-trade space has become, I would not be surprised if the rules around non discriminatory access to post trade services were removed post Brexit, so that the current 30 month exemption remains permanent.

Finally there is of course the option of revised treatment for third country MiFID firms.

A position that has been put forward by one Member State and which has been widely reported in the press over the last few weeks – effectively forcing firms from third country jurisdictions to set up inside the EU in order to continue to service EU clients. This suggested change would occur regardless of whether that jurisdiction has an equivalence decision or not.

Needless to say I will be arguing extensively against this course of action in Brussels, and would be doing so had Brexit not occurred as I believe the EU as a whole benefits from open access and the free flow of global capital.

I hope I have conveyed to you the situation and challenges that legislators face in this period after implementation.

I’ve touched on how we are equipped to react to your concerns, and mentioned the continued reviews and monitoring that is taking place at a political level in Brussels.

I hope this is useful to you in your interaction with policy makers moving forward.

I know we will pick-up on some of the specifies points during the panel later and so any questions I’m sure can be addressed then - meanwhile I’ll had you over to Peter.