European internal market and services commissioner Michel Barnier asserted the importance of adopting the “correct structure” for Europe's financial markets when he officially launched a long-awaited review of MiFID by the European Commission (EC).
The EC has asked for responses to a consultation document by 2 February 2011 and is expected to issue a new version of the directive in Q2 2011.
In the document, the EC has proposed a more detailed system of categorisation and regulation of trading venues – a bone of contention for stock exchanges since MiFID was introduced in November 2007 – options for the introduction of a consolidated tape in Europe and a new regulatory framework for firms engaged in automated trading, including high-frequency traders.
Speaking at a press conference, Barnier said, “Markets move more quickly than the political agenda, and people working in the financial industry have short memories. Therefore it is important that we get the correct structure in place.”
The review of MiFID has been prefaced by a series of consultations held by the EC and the Committee of European Securities Regulators (CESR), the body charged with harmonising regulation across Europe, on a variety of financial markets topics. The results of the CESR consultations were presented as technical advice to the EC on 29 July 2010.
The EC was mandated to review MiFID before the end of 2012, but has extended the review in light of the financial crisis, technological developments and changes in market practice. The directive has also been expanded to include non-equity instruments including over-the-counter derivatives.
Barnier said, “The original aim of this key piece of European legislation was to create a robust common regulatory framework for Europe’s securities markets. In many ways, it has been a success. But the world has changed and we all know the current framework needs improvement. My objective is to ensure that the revision of MiFID will lead to a stronger regulatory framework, adapted to the new trends and players on financial markets. And a framework which leads to greater market transparency and efficiency, as well as more protection for investors.”
He highlighted crossing networks and high-frequency trading firms as examples of operations that needed to be more transparent, in order that regulators know “who's doing what and to whom”. Firms whose operations have an effect on market structures should be held to account, he added.
To improve market transparency the consultation proposes the creation of a new category of trading venue, organised trading facilities (OTFs), which would capture any system that brings buyers and sellers of financial instruments together that are not multilateral trading facilities (MTFs) or systematic internalisers (SIs). This would include a sub-category for broker crossing networks (BCNs), defined as “a hybrid between a facility to assist execution of clients’ orders and a multilateral system that brings together orders”.
The proposal clarifies that a BCN that crosses with its own proprietary flow would be considered an SI, while those that allow with third-party access would be reclassified an MTF. The consultation also asks for feedback on the setting thresholds on OTF activity, beyond which a venue could be reclassified as an MTF.
The EC document outlines three options for creating a consolidated tape of pan-European post-trade equity market data: establishing a non-profit organisation; selection of a commercial operator based on a call for tender; or allowing vendors to create their own competitive solutions within defined guidelines. The paper also proposes the unbundling of post-trade data by exchanges, which is widely considered necessary for the creation of a consolidated tape, at a reasonable price. Members of the Federation of European Securities Exchanges have already committed to unbundling.
A definition of automated trading is suggested, to allow the directive to address the risks posed by high-speed trading systems being used incorrectly or functioning in an unintended manner, plus the threat that increased trading volumes pose. Risk controls could be imposed on firms that engage in automated trading, and they may be obliged to inform authorities of algorithms used with detail on how they function.
For those dark pools not operated by brokers, a minimum size for orders may be added to the reference price waiver, which is used by most dark MTFs – such as Chi-X Europe's Chi-Delta and Turquoise's dark pool – to forego the publication of pre-trade quotes.
It is proposed that the European Securities and Markets Authority (ESMA), which will replace CESR on 1 January 2011, will be given responsibility to propose binding technical standards on the specific methods for the application of the waivers and monitor the use of waivers on an ongoing basis. ESMA, along with national regulators, will be handed further powers to enforce standards, including the ability to act at a national level in times of crisis which have been designated as such by the European Council.
In the MiFID consultation document, the EC also asks for responses to a proposed change that would result in a reduction in the timeframe allowed for real-time reporting from three minutes to one minute and would require systems to publish details or trades as soon as they are entered into the system, rather than in ”batch' form. There are also suggestions for shortening the delays used for large trades.
The consultation document also seeks feedback on issues such as improving access to execution quality data, clarification of sanctions for non-compliance with MiFID and a new regime for telephone and electronic monitoring to improve detection of abusive and manipulative behaviour.
Following the consultation, the EC will draft legislation for consideration by European Parliament and the European Council. The legislation is not expected to become law until 2013.