Plans by the European Commission (EC) to create a new supervisory framework for Europe’s financial markets could help assuage the buy-side’s concerns about poorly-drafted execution policies, according to a senior Commission official.
Speaking at yesterday’s TradeTech Liquidity event in London, Maria Velentza, head of the securities market unit at the EC’s internal market and services division, said that best execution “may be on our table” during the Commission’s review of MiFID, due to commence by the end of this year. But she suggested that buy-side concerns over badly-worded best execution policies from brokers may be more to do with enforcement than a fault with the regulation itself. Lack of transparency on how client orders are executed by brokers across Europe’s fragmented equities markets has been a growing worry for buy-side market participants since the Markets in Financial Instruments Directive was introduced two years ago.
While some countries are sophisticated in their oversight of best execution, others, she said, faced a “learning curve”.
“We hope the creation of new authorities, which are intended to coordinate many supervisory issues and exercise more peer pressure among regulators, will improve the quality of supervision in bigger and smaller markets,” said Velentza.
In September this year, the EC adopted a draft legislation to create a new supervisory structure for Europe’s financial markets. Under the plans, the Commission will establish a European System of Financial Supervisors composed of national regulators and three new European Supervisory Authorities. These new authorities – the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority – would replace the existing ‘level 3’ committees: the Committee of European Banking Supervisors, the Committee of European Insurance and Occupational Pensions Supervisors and the Committee of European Securities Regulators respectively.
Velentza also suggested that the EC could step in and mandate a European ‘consolidated tape’ of post-trade data following its review of MiFID. While the possibility of a consolidated tape is not explicitly part of the review, the Commission will consider “removing obstacles to the consolidation of trading data”, according to Velentza.
“We have been receiving information that access to data is not optimal, that the cost of data is still quite high and also very often that the format in which data is produced diverges and doesn’t facilitate data mobility, so we see there is an issue,” said Velentza. “We were hoping the market would create a solution but in my view, based on a preliminary snapshot of what we have been seeing so far, this is not the case. We won’t exclude looking at a solution like the US consolidated tape.”
However, she stressed that the nuances of the European markets must be taken into account when creating a solution to the data issues. “We cannot simply import a solution because it may be harmful to the market,” she said.
In addition to data consolidation, the EC’s mandatory review will include post-trade transparency and provisions for systematic internalisers, i.e. liquidity pools run by brokers. A further area up for examinations is the waivers under which MiFID allows certain venues to forgo its pre-trade transparency requirements.
The basis for the waivers, said Velentza, was to avoid “excessive transparency” for large-in-scale orders. “This approach has not changed. However, what we need to look at is whether the thresholds for these waivers are always appropriate. I don’t think the general philosophy of the directive needs to be revised but it is a question of ensuring the right balance is there.”
Velentza said that the purpose of the review was not to create a ‘MiFID II’ directive, indicating that changes would only be made to facilitate the objectives of the original legislation.