A lack of consensus over dark pools and pre-trade
transparency waivers risks pushing a conclusion to the trialogue on MiFID II into
the first quarter of next year, according to those familiar with the situation.
In October, Markus Ferber MEP, who is
co-ordinating the European Parliament’s contribution to the trialogue process
that will create the final text of MiFID, hailed a major breakthrough in
settling some of the many differences between the Parliament and the European
However, many industry members fear that a
lack of agreement on dark pool regulation and the waivers that enable dark
trading, could delay implementation of the directive.
Some MEPs are thought to have been
impressed by a recent proposal by a number of influential industry groups,
including asset manager Fidelity, the Investment Management Association (IMA)
and the London Stock Exchange, which called on European regulators to adopt a
similar approach to Canada and Australia, where waivers are only allowed if
meaningful price improvement has been achieved.
The proposal was made to allay concerns
that pre-trade transparency waivers have been widely overused, but still enable
dark pool trading to continue in Europe where appropriate.
It is thought that Ferber, along with fellow
ECON committee members Kay Swinburne and Sharon Bowles, support the proposal
and circulated a “non-paper” – the EU’s term for a discussion document –
suggesting such a measure would be more effective in achieving the European
Commission’s overall objective – giving displayed orders priority of execution
over dark orders – than the cap initially put forward by the Irish presidency.
However, it is thought that some MEPs and
the European Council have rejected the proposal, arguing it is creating an
incentive to trade in the dark. Industry participants fear there has not been
enough understanding of the use of waivers in the market.
“There’s still a fair amount of uncertainty
around MiFID II rules on pre-trade transparency waivers and the knock-on impact
this will have for dark pool trading,” said Andrew Bowley, head of business operations
and risk at agency broker Instinet Europe. “It appears that in Brussels there are
reservations about the industry proposal to allow waivers to be used if there
is meaningful price improvement.”
However, Richard Metcalfe, director of
regulatory affairs at the IMA, said he is hopeful that the trialogue will
consider the experiences of other countries.
“The trialogue has been gathering evidence
from other regimes and if you look at what has happened in Canada, it shows
that introducing the need for meaningful price improvement has reduced the
overall level of dark trading,” he explained.
Bowley is concerned over the lack of certainty
over the future of different types of waiver: “Work on waivers in MiFID has
only really focused on the mid-point price reference waiver but there are other
price referencing waivers used and it’s not clear which of these will persist
and what effect that will have on the market. There needs to be more discussion
in Brussels on waivers.”
Dark pool trading currently accounts for
around 11% of executable liquidity in Europe in 2013 so far, according to a
recent report from Tabb Group. The European Council had suggested implementing
caps on dark trading relative to the size of the market as whole, suggesting 8%
would be an appropriate level. However, it is rumoured the Commission may be
about to write to MEPs to withdraw that proposal.
So far, only issues surrounding
high-frequency trading have been agreed and dark pools and post-trade
interoperability are seen as the areas where opinions between the trialogue
parties differ the most. But there are a total of 10 titles in MiFID II that
need to be addressed and this could risk a major delay to the process.
European Parliament elections are due to
take place in May 2014 and if the trialogue is unable to agree on MiFID’s text
before MEPs leave Brussels to begin their election campaigns then it will need
to be returned to the new Parliament for debate.