Thursday, May 02, 2013 8:35:34 AM

Irish aim to tackle twin hurdles to MiFID consensus

Rules on dark pools and post-trade competition are the remaining barriers to agreement on MiFID II by members of the Council of the European Union ahead the EcoFin meeting scheduled by the Irish Presidency for 14 May.

If member states are able to reach consensus by mid-June, trialogue with the European Commission and European Parliament to reach a final text could begin immediately after the summer break.

At a recent conference, Jasper Jorritsma, policy officer for internal markets at the European Commission, described the Irish timetable for completing MiFID II's legislative passage as "very ambitious".

MiFID II both reviews and amends the regulatory framework imposed on Europe's equity markets in 2007, but extends its reach to other financial markets and lays out some of Europe's new rules - along with the European market infrastructure regulation - for reform of OTC derivatives trading.

The issue of pre-trade transparency, and specifically which waivers should be available to dark pool operators, has divided Council members. The Commission sought to abolish all waivers except for large in scale - which permits only larger trades to be executed off exchange - in its original draft of MiFID II. But the Council has debated whether insist on the inclusion of the reference price waiver (RPW) which is currently widely used by dark pools to execute trades at the mid-point of the best quoted bid as sourced from a reliable reference market.

At a March meeting, the Irish proposed an 8% cap of total value traded in any equity for venues to qualify for the RPW. It would be calculated on a 12-month rolling basis, with a two-month ban on trading the stock in a specific dark pool if breached.

Clearing access

The second issue dominating the latter stages of Council debate centres on open access provisions under articles 28-30 of MiFIR, the regulation accompanying MiFID II. The Council appears divided on the rules relating to how central counterparties (CCPs) and exchanges should open up to one another to allow post-trade competition. At present a number of trading venues allow brokers to choose between clearing houses, which encourages competition on price and service, but some market participants fear that provisions to enforce access will be watered down.

A draft Council version of MiFID II seen by proposed that venues trading over €100 billion in annual turnover for securities and money market instruments and €500 billion for exchange-traded derivatives will have to grant clearing houses access to their trade feeds.

Diana Chan, CEO of pan-European clearing house EuroCCP, believes the MiFIR rules will help propel the region towards interoperability, but said the industry should move ahead of the rules.

"Trading venues have different commercial strategies and for many this debate comes down to the core question of opening up or maintaining vertical silos. If venues see the benefit of opening up access by CCPs to their trade feeds we will have wider adoption of interoperability than if it is mandated by regulation," she said.

Richard Henderson +1 212 217 6916