‘City is defining the rules of Continental Europe more than ever post-Brexit’, says Euronext cash and derivatives head

European regulators have made several U-turns in the last few months, in particular around their stance on systematic internalisers and dark trading, that mimic UK proposals.

The influence of the City of London and the UK’s Financial Conduct Authority (FCA) on European regulation has never been greater, says Euronext’s head of cash and derivatives, Simon Gallagher.

Regulators in the UK and Europe have been shoring up their newly separate regulatory regimes following Brexit, taking seemingly divergent stances to transparency and dark trading. However, a U-turn proposal put forward the Czech Presidency and then approved by Member States at the end of last year signals a change of direction for EU regulation.

Instead of the originally suggested clamp down on dark pools and quasi-dark systematic internalisers, the new proposal suggests a 10% double volume cap and no new limits to SIs’ ability to match at midpoint.

“The paradox behind the whole Mifir Review is that the weight of the FCA and the City of London in European regulation has never been greater. Post-Brexit the city is defining the rules of continental Europe more than ever before,” Simon Gallagher, head of cash and derivatives, told The TRADE.

“The priority of Continental authorities now seems to be to compete with the City of London, so we don’t see an outflow of business to the City. This has been a major driver behind the current Mifir review and its approach to SIs and transparency. If regulators accept that SIs will form a material feature of the European execution landscape, then they should be regulated in a manner that reflects their scale, with reinforced transparency obligations and, above all, improved reporting on the nature of the trades that occur inside them.

“There is the prospect that business will shift to them as flows concentrate at big banks. If you’re having 20% of the market going through SIs to regulate that you need to know trade categories etc. SIs also compete heavily around the closing auction which is a key part of price formation.”

The draft regulation proposed by the Czechs in December is now being negotiated by the EU Parliament. Its proposals included a restriction on payment for order flow (PFOF), leaving it at the “discretion” of Member States to allow the practice in their territory should they wish. Venues such as Euronext were vocal at the time of publishing that this discretionary approach to regulation across EU Member States would not support more competition in the Bloc, which already suffers from more fragmentation than other global markets.

However, according to sources familiar with the matter, the EU is now likely to mirror the approach of UK’s FCA more closely, with a blanket ban the practice all together following its being tabled in parliament.

“The FCA has clear rules on PFOF and we’re aligned with their view of the world, whereas in Germany there is a toleration of the practice.  As a pan-European operator, this lack of a joined-up, coherent vision of the markets is frustrating for us,” Gallagher told The TRADE.

“We don’t think payment for order flow is a good thing. It disrupts markets, creates conflicts of interest etc. Economics are economics, these aren’t saints offering free trading. There’s no free lunch. A price is paid somewhere and it’s paid in the spread and the implicit trading costs.”