Firms face massive MiFID II pre-trade changes

Trading venues and swaps dealers will be subject to a wave of new pre-trade transparency requirements.

Pre-trade transparency requirements set out in MiFID II will radically affect the models operated by Europe’s trading venues and swaps dealers, according to experts speaking at the FIX EMEA Trading conference.

The incoming regulation will introduce a whole set of pre-trade transparency requirements that will, in large, be completely new for some European firms.  

However, the new requirements could fundamentally change the operating models not only for the trading venues themselves, but also the swaps dealers in executing the trade

“Depending where you trade it will set the scene of what pre-trade requirements you will face,” said Ashlin Kohler, director, global rates eCommerce, FICC, Citi.

 “What is new for the venue world is that request for quote (RFQ) style trading, which is predominant in customer markets, is also in scope for pre-trade, whereby all responses will be required to be made public.”

The resulting RFQ model could mean market participants will not only be flooded with information, but for end-clients they could be subject to provide more information than they would have liked.

For venues that operate both RFQ and central limited order book (CLOB) trading, such as interdealer brokers (IDBs), they will also be heavily impacted.

“The pre-trade transparency requirements of MiFID II significantly change the way in which IDBs currently operate and makes us more transparent than we have ever been before,” said Dan Marcus, global head of strategy and business development, Tradition.

“We will have to demonstrate pre-trade transparency by pre-trade bid disclosure applying to our voice brokers.‎ Posting of bids and offers on to the MTF would satisfy that requirement.”

MiFID II will also introduce in the non-equities space a new concept of ‘systematic interalisers’, which is intended to capture active market makers that are frequent and substantial in a certain class of derivatives. These systematic internalisers will also have their own pre-trade requirements, according to Citi’s Kohler.

“Pre-trade requirements are more onerous for systematic internalisers trading off-venue.  This could have more effect in markets like OTC derivatives where the lion’s share is still done bilaterally by voice,” Kohler added.