The TRADE - MiFID II Implementation
As we get closer and closer to the implementation date of MiFID II it is easy to get bogged down by the detail.
Its all about writing code for new algorithms
Developing systems that can fulfil the new requirements
Consulting lawyers over how to deal with the minutiae of the law
Working out what is and isn't allowed in the real world
Its easy to forget the guiding principles behind MiFID II and why the directive was reviewed and updated in the first place.
"Directive 2004/39/EC- MiFID 1 - established rules for making the trading in shares admitted to trading on a regulated market pre-trade and post-trade transparent and for reporting transactions in financial instruments admitted to trading on a regulated market to competent authorities. The directive needs to be recast in order to appropriately reflect developments in financial markets and to address weaknesses and close loopholes that were, inter alia, exposed in the financial market crisis."
Direct from the recitals of both MiFIR and the amended MiFID.
While huge air time has been given the all of the new areas that MiFID II now covers -
derivatives trading, fixed income transparency, position limits, research costs etc.
The equity markets and the appearance of unwelcome behaviour as a result of perceived exploitation of loopholes was the real motivation for opening up the huge package we now know as MiFID II.
During the political process it often felt like we were discussing MiFID with a room full of conspiracy theorists
Commission staff, Member States experts, and MEPs thinking up ways that different provisions might be gamed by the market so as to future proof the legislation
The spectre of the Financial Crisis always hanging in the background
Financial market innovation to avoid capital rules was seen as one of the many drivers of what happened in 2008-2009.
As a Conservative politician, I would always prefer a principles based approach to regulation, with a strong enforcement mechanism for those found to be in breach.
Detailed and prescriptive rules cost more money to implement and often create an industry employed in getting around them.
But the principles based approach to financial regulation and supervision was thoroughly trashed by the events of 2008.
For this reason we ended up with the compromise of MiFID II.
A balance between the original directive that was more principles based
And a new, more prescriptive regulation that gave a lot more rules and direction as to how market participants should behave.
But those principles are still there.
The basic principle that the fairest method of trading shares is in an open and transparent market free of conflict of interest by the market operator.
Its natural that you want to see everyone else's cards but allow no one to see yours
Its the best way to get an advantage
But clearly it can't work on a macro scale
I was a clear supporter of allowing justified exceptions to blanket pre and post trade transparency,
Of ensuring that the rules governing trading venues did not threaten the ability to get the best price
But all under the guiding principle that transparency should be the optimum scenario
Price discovery and market integrity go hand in hand
Many argued that we should delete the SI regime entirely
It had no place in the equity trading world
There is a reason why the new OTF cannot be used for equity trading
The new MTFs had been successful in creating pan EU platforms for secondary trading
The demand for choice by market participants had given way to a discussion around liquidity fragmentation
Were costs genuinely higher because of the many new platforms that had been developed?
Or were market participants getting a better price because they could now choose the venue that most suited their strategy?
We had no data to back up either hypothesis
The consolidated tape that we had been promised would emerge as a market led initiative never came to be under MiFID I.
Best Execution was a principle assumed by the buyside but in practice there was no way of evaluating whether they received it.
But one thing was clear at the time, and still is today,
Policy makers want more transactions to take place on the public markets and less in the dark.
Blunt tools like the double volume cap - and the share trading obligation were introduced because of a fear of loopholes
The reason why your compliance guys are tearing their hair out over the hundreds of fields required under the best execution reporting requirements was to fill that data vacuum.
To give the buyside a tool they could use to evaluate the claims of their brokers as to whether they were getting the best price at the right speed and the right cost.
In a world of big data, MiFID II should be opening up markets, making them more transparent, and more efficient
and ultimately better for the investor.
Therefore it is really disappointing for me and my colleagues in the entire negotiating team in the Parliament,
less that a year away from implementation,
to be told stories of how some market players are already seeking ways of innovating around the new rules
Using grey areas and interpretative differences to avoid giving investors the best price.
Politicians don't see it as finding a clever loophole to get around the rules
Proving bankers are smarter than legislators
We see it as yet another way that the financial industry is seeking to line its own pockets at the expense of the average investor.
The Parliament negotiating team sent a letter last week to the Commission, laying out in no uncertain terms that we agree with ESMA.
Networks of Systematic Internalisers, run by brokers, HFT firms or anyone else, are against the letter and the spirit of the MiFID II framework.
That was the message from all political groups
It is not a left-right political issue to want markets to be fair and efficient
That's why we have asked the Commission to report back to use on what actions they are considering taking to make absolutely clear this perceived loophole is not open to exploitation.
They may come back and tells us categorically that it is already prohibited under the level 1 text and the delegated relegation adopted last year.
Allowing ESMA to release guidelines or Q and A to that effect.
or they may suggest an amendment to that delegated regulation for the avoidance of any doubt
That can be done by the Commission immediately and once the scrutiny periods of the Parliament and Council are observed of one month, come directly into force.
In the highly unlikely event that the Commission reply and say the level 1 text does allow for networks of SIs,
a level 1 change of MiFID when there is already full political agreement, can be done even faster than last years quick fix to adjust the implementation date.
Particularly with Markus Ferber's German efficiency taking the lead.
If policymakers have to make such a dramatic statement, expect disruption and higher costs on the markets side and no further time to implement new rules.
A bad outcome for everyone.
MiFID I and II are aimed at making markets more transparent, fairer and efficient for everyone.
We want a vibrant capital market
We want investor choice
We want lower costs and better returns for investors
These political objectives should be welcomed by the financial services industry
It should help you achieve the best outcome for your clients and your investors
I still believe that is what can be achieved as MiFID II is implemented.
I look forwards to further discussion on the panel.