A lack of consensus over dark pools and pre-trade transparency waivers risks pushing a conclusion to the trialogue on MiFID II into the first quarter of next year, according to those familiar with the situation.
In October, Markus Ferber MEP, who is co-ordinating the European Parliament’s contribution to the trialogue process that will create the final text of MiFID, hailed a major breakthrough in settling some of the many differences between the Parliament and the European Council.
However, many industry members fear that a lack of agreement on dark pool regulation and the waivers that enable dark trading, could delay implementation of the directive.
Some MEPs are thought to have been impressed by a recent proposal by a number of influential industry groups, including asset manager Fidelity, the Investment Management Association (IMA) and the London Stock Exchange, which called on European regulators to adopt a similar approach to Canada and Australia, where waivers are only allowed if meaningful price improvement has been achieved.
The proposal was made to allay concerns that pre-trade transparency waivers have been widely overused, but still enable dark pool trading to continue in Europe where appropriate.
It is thought that Ferber, along with fellow ECON committee members Kay Swinburne and Sharon Bowles, support the proposal and circulated a “non-paper” – the EU’s term for a discussion document – suggesting such a measure would be more effective in achieving the European Commission’s overall objective – giving displayed orders priority of execution over dark orders – than the cap initially put forward by the Irish presidency.
However, it is thought that some MEPs and the European Council have rejected the proposal, arguing it is creating an incentive to trade in the dark. Industry participants fear there has not been enough understanding of the use of waivers in the market.
“There’s still a fair amount of uncertainty around MiFID II rules on pre-trade transparency waivers and the knock-on impact this will have for dark pool trading,” said Andrew Bowley, head of business operations and risk at agency broker Instinet Europe. “It appears that in Brussels there are reservations about the industry proposal to allow waivers to be used if there is meaningful price improvement.”
However, Richard Metcalfe, director of regulatory affairs at the IMA, said he is hopeful that the trialogue will consider the experiences of other countries.
“The trialogue has been gathering evidence from other regimes and if you look at what has happened in Canada, it shows that introducing the need for meaningful price improvement has reduced the overall level of dark trading,” he explained.
Bowley is concerned over the lack of certainty over the future of different types of waiver: “Work on waivers in MiFID has only really focused on the mid-point price reference waiver but there are other price referencing waivers used and it’s not clear which of these will persist and what effect that will have on the market. There needs to be more discussion in Brussels on waivers.”
Dark pool trading currently accounts for around 11% of executable liquidity in Europe in 2013 so far, according to a recent report from Tabb Group. The European Council had suggested implementing caps on dark trading relative to the size of the market as whole, suggesting 8% would be an appropriate level. However, it is rumoured the Commission may be about to write to MEPs to withdraw that proposal.
So far, only issues surrounding high-frequency trading have been agreed and dark pools and post-trade interoperability are seen as the areas where opinions between the trialogue parties differ the most. But there are a total of 10 titles in MiFID II that need to be addressed and this could risk a major delay to the process.
European Parliament elections are due to take place in May 2014 and if the trialogue is unable to agree on MiFID’s text before MEPs leave Brussels to begin their election campaigns then it will need to be returned to the new Parliament for debate.