Broker crossing networks (BCNs) face significant change under MiFID II as the latest iteration of the European directive spells out new rules for some venues but provides no real clarity on how it will treat dark pools.
“Dark trading in the context of MiFID is a spectrum comprising BCNs, systematic internalisers (SIs) and multilateral trading facilities (MTFs),” said Ian Salmon, head of enterprise business development at Fidessa. “Pre- and post- trade obligations vary and vagaries in the interpretation of the rules have led to a confusing array of different venues.”
While definitions and obligations regarding trading venues are promised under MiFID II, the current draft, leaked widely last week, does little to crystallise these.
“[The first iteration of] MiFID formalised the concept of systematic internalisers, placing broker crossing activities firmly in the spotlight,” Salmon said. “Once the mechanism of crossing a broker's proprietary business with internal flow raises its head, it enters the realms of systematic internalisation. But this is far from straightforward and it was always the greyest area of MiFID's principles-based regulation, with no clear guidelines as to what precisely makes an organisation a systematic internaliser.”
Salmon said firms not considered to be SIs or subject to SI-specific regulation as it currently stood, would likely fall into a new category of venue: an organised trading facility (OTF).
Under MiFID II, an OTF is defined as “any system in which third party buying and selling interests meet”, covering both bilateral and multilateral systems, discretionary or non-discretionary.
Venues considered OTFs, including those with dark pools, cannot trade against proprietary capital and will be subject to substantially different reporting requirements than other venues, such as multilateral trading venues.
“Firms operating dark pools in this space need to ensure their technology is sufficiently flexible to allow them to transition between them and still meet the regulatory requirements applicable to each category of venue,” Salmon said.
The EC held its first consultation on MiFID II from December 2010 to February 2011. Final proposals were expected to be presented to the European Parliament and the Council of the European Union by the end of Q1 2011 but were delayed.
Most expect the final legislation to be officially presented on 21 October but some have suggested the directive and separate regulation could be delayed for a fourth time until November.
The Commission advises the drafting process is not yet complete and its content could change.