Pan-European regulatory regime MiFID II was yesterday jolted forward as the Council of the European Union’s final position emerged, although dark pool use for the buy-side will be significantly reduced.
Key issues resolved yesterday during a meeting of permanent representatives that will inform the Council’s stance included incorporating equities in the new organised trading facility (OTF) venue category, defining volume caps governing waivers that allow dark trading and finalising access details for venues and clearing houses.
The Council’s inclusion of equities for OTFs is at odds with the European Parliament’s position and the issue is expected to widely feature during the trialogue process by which the two legislative bodies negotiate a final text with input from the Commission. Experts predict this process will commence after summer and run for six to nine months.
If equities are included in the OTF category, broker-crossing networks (BCN) will have to register under the new regime, which will place more prescriptive guidelines on their operation. However, the Parliament’s MiFID II stance, which omits equities from OTFs, would force BCNs to register as multilateral trading facilities (MTFs) or systematic internalisers (SIs), essentially outlawing BCNs and further restricting buy-side dark execution.
Speaking The TRADE for its Q2 issue ahead of yesterday’s Council decision, Owain Self, global head of algorithmic trading for UBS, said a good outcome would be an OTF regime that provides clear guidelines about what brokers can do with their BCNs – such as no co-mingled flows and greater transparency of execution – rather than forcing all BCNs to register as SIs or MTFs.
“Either we will have no BCNs and all that flow will be directed into MTFs, which would be negative from a client execution perspective; or we will have an OTF regime in which the bar will be raised in terms of only trading at a larger size,” he said.
“We won’t be able to offer the same execution service to clients if they remove BCNs or raise the barrier to MTFs, via changes to pre-trade transparency waivers,” Self said.
Volume cap concerns
Potentially of greater concern for the buy-side will be the volume caps for use of the reference price waiver that permits execution in dark pools using prices formed in lit venues as a reference. The Council has sought a volume cap of 4% of total trading in a specific security for one trading venue, and 8% across all venues, beyond which the waiver will not be used, sending more volume onto lit markets.
The third pillar of contention delaying the Council’s position surrounded open access rules for central counterparties (CCPs) and exchanges. The Council has called for exchanges to provide non-discriminatory and transparent access to CCPs, which opens the door to interoperability.
This issue may draw greater political posturing as German representatives are expected to push for limits to this to protect Deutsche Börse’s leading derivatives trading and clearing business Eurex. Conversely, UK officials have backed MiFID II’s open access rules for greater interoperability.
The Council’s MiFID II position will likely be formally set when member states’ finance ministers meet on 21 June at a planned ECOFIN meeting. Trialogues may begin soon after summer and conclude mid-way through 2014. The European Securities and Markets Authority will then craft technical standards for the final rules.