Batting for Britain?

How will Britain’s new financial markets regulatory structure change how the City is represented in Europe?

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How exactly does the FCA represent UK buy-side interests to European regulators?

As the UK's key regulatory body for securities market participants, the Financial Conduct Authority (FCA) contributes to the formation of level two policy within the European Securities and Markets Authority (ESMA) alongside representatives from the 27 EU member states.

Currently, the FCA is present on 11 permanent ESMA committees, where rules are developed in accordance with level one legislation agreed by the European Parliament and Council of the European Union, pursuant to guidelines policed by the European Commission.

The FCA's input to level two rules is informed in part by its understanding of the business models of the organisations it regulates, which includes asset managers alongside many other disparate retail and institutional financial intermediaries.

As the largest financial market in the region, the UK has a strong voice within ESMA's rule-making process, despite being outside of the euro-zone. Martin Wheatley, CEO of the FCA also sits on ESMA's governance committee and contributes to high-level organisational decision-making.

Has there been a change in how the FCA will work with ESMA from how it operated under the FSA?

Not at first. The FCA will take over the bulk of the FSA's role and many key FSA staff members will migrate across to the new entity to facilitate a smooth continuity of operations. However, there have been suggestions the dual-pronged approach created by the establishment of the FCA and Prudential Regulatory Authority (as part of the Bank of England) may potentially lead to divergent positions on specific issues. The Bank of England works with the European Central Bank (ECB) through the European System of Central Banks (ESCB), alongside the central banks of other EU member states in pursuit of the ECB's overarching aims of maintaining healthy markets and stable prices. The ESCB represents Europe's central banks on each of the ECB's three main decision-making bodies: the executive board, governing council and general council.

PJ Di Giammarino, CEO of European regulation advisor JWG, works with both the financial service industry and regulators to provide input and guidance on implementing and developing regulation and believes there will be minimal change in how the FCA interacts with ESMA compared to the FSA.

"The FCA will support UK buy-side interests in ESMA through the committees, but it will also consult with market participants in the UK on an increasingly regular basis as details in MiFID II emerge," Di Giammarino said. 

What can the UK buy-side expect from the FCA in terms of key MiFID II reforms?

MiFID II touches many areas of securities trading and may result in a number of changes that UK-based institutional investors consider contrary to their interests, such as changes to how dark pools and high-frequency trading (HFT) are regulated. The UK buy-side has also been very vocal on the lack of a consolidated market data tape across the European equities markets. There is plenty of evidence that the FCA is aware of these concerns.

Tim Rowe, head of the trading platforms and settlement team at the UK's Financial Conduct Authority, speaking at the TradeTech 2013 conference in London last week said difficulties in reaching consensus on key elements of MiFID II were in part due to the reactive role regulators play in catching up to the industry.

Acknowledging that regulators in Europe fret about HFT and dark pools, Rowe suggested such concerns must be refined to focus on specific issues so as not to inhibit algorithmic trading unnecessarily. "This is reflected in our continuing negotiations around MiFID ll," he said.

But until the EU member states agree a common position on MiFID via the Council of the European Union and then iron out the differences with the European Parliament's text, there is relatively little that the regulators can do but wait.

Contentions issues dividing politicians, regulators and market participants include whether to include equities in MiFID II's organised trading facility (OTF) trading venue category and rules aimed at curbing HFT, such as a minimum resting time, order-to-trade ratios and the abolition of the maker-take pricing model.

Establishing a pan-European consolidated tape has also received much attention from market participants, as a recent industry-led initiative to create a tape - the COBA Project - was put on indefinite hold due to a lack of regulatory clarity and the inability for data providers (chiefly exchanges) to negotiate a new way of disseminating market information.

"Developing consolidated tapes in Europe, like forming trade repositories, is a difficult task, and many interests will have to converge before they materialise," PJ Di Giammarino, said. "ESMA may lead the development of a tape, but it may be a case - like EMIR - of solutions being mandated with no clear process outlined, which can lead to delays."