If MiFID II plans to cap dark pools prove unworkable then the European Securities and Markets Authority (ESMA) should advise the European Commission to rework the proposals, according to the UK’s senior financial markets regulator.
Speaking at the ICI Global conference in London, Financial Conduct Authority (FCA) CEO Martin Wheatley said pan-European securities regulator ESMA cannot choose to simply ignore the proposal to cap dark trading in Europe at 4% for an individual venue and 8% for the market as a whole, if it proves to be impossible to implement or significantly detrimental to the market. But, he added, the Paris-based watchdog can advise policy-makers to reexamine the regulation.
MiFID II is currently in the trialogue phase of discussion, where the European Commission, European Parliament and Council of the European Union must agree on a final text for the directive. So far, agreement has been reached on regulating electronic trading and restrictions to the use of reference price waivers, as well as the dark pool cap originally proposed by the Commission.
The UK regulator is setting up its own MiFID II implementation project and Wheatley called on firms and industry associations to work with ESMA on the implementation of the cap to ensure it did not distort the market.
“Only time will tell if MiFID’s dark pool cap will need revising. ESMA can advise the Commission on whether or not it’s possible to implement the cap, but it cannot ignore all or part of a directive,” Wheatley added.
Speakers in a panel on lit vs dark markets agreed that the industry needed to work together to ensure MiFID II’s implementation did not adversely impact markets and lead to a loss of liquidity.
Per Lovén, head of international corporate strategy at Liquidnet Europe, said the biggest risk to the market was the introduction of bad regulation.
“It has always been a challenge to source liquidity and regulation can’t do anything to fix this. But the wrong regulation could make a bad situation worse,” he said.
Rober Barnes, CEO of pan-European multilateral trading facility Turquoise, said that the industry should learn from its experiences with the original MiFID and work to change it.
“The first MiFID contained a number of problematic areas but the industry was able to influence it and evolved considerably after the directive was finalised,” he explained.
But there are concerns that the proposals in MiFID II could be far less flexible than its predecessor.
“MiFID II is quite different. The first MiFID was quite poorly structured and lacked clarity on a lot of issues whereas it seems this legislation will have a lot more detail at the end of the level one discussions,” warned Mark Hemsley, CEO of BATS Chi-X Europe.
“There’s a lot less room for maneuvre, but we still need to work together to ensure that we have a working market after all this.”