Despite calls for bulge-bracket brokers’ internal crossing networks in Europe to be reclassified as multilateral trading facilities (MTFs) under MiFID, regulators should not rush into any changes, according to David Lawton, head of markets infrastructure and policy at the UK’s Financial Services Authority (FSA).
“There are some important differences to note between the business models of internalisation and crossing on the one hand, and that of MTFs on the other,” Lawton told the European Exchanges Summit in London yesterday. “More thought is needed before we rush headlong into assuming that firms need to be forced into the MTF box.”
His views appear to clash with those of the Committee of European Securities Regulators (CESR), the European Commission body charged with ensuring regulatory harmonisation across European Union member states.
Eddy Wymeersch, the committee’s chairman, has been quoted in the press as saying that brokers’ internal pools should reorganise as MTFs “or something similar”. However, the committee has not yet adopted an official position on the classification of broker crossing networks.
Certain brokers’ pools are not classified under any of the three MiFID venue types – MTF, regulated investment exchange or systematic internaliser. Some argue that the systematic internaliser designation was intended to capture broker pools, and so those that remain outside this definition are effectively unregulated. Others argue that because bulge-bracket brokers’ crossing engines offer MTF-like order matching functionality, they should be regulated similarly. Crossing networks offered by agency brokers, such as ITG’s POSIT, are registered as MTFs, for example.
The calls for broker pool reclassification were first made by the Federation of European Securities Exchanges and some individual exchanges in CESR’s call for evidence on the impacts of MiFID.
While acknowledging the limited appetite for brokers to become systematic internalisers – CESR lists 13, 11 of which are UK based – Lawton denied that those pools outside the three MiFID venue types had slipped through the regulatory cracks. “It doesn’t necessarily mean that investment firms are not complying with the rules. The systematic internaliser and MTF provisions are relatively high-level and principles based, and there a number of criteria that have to be satisfied in each case to be put into those boxes,” said Lawton. “Nor does it mean, as some have suggested, that this business being done by investment firms is somehow unregulated. The investment firms are of course fully authorised by the relevant regulators. They have to offer client protections and follow market conduct rules.”
He added that while they lacked pre-trade transparency obligations, broker pools had to comply with the same post-trade reporting rules as other platforms.
Lawton highlighted a number of areas in addition to regulatory definitions that CESR and the European Commission (EC) could consider in the forthcoming review of MiFID, due to start at the end of this year, including whether the four pre-trade transparency waivers MiFID provides for dark pools are still effective.
“They were drafted for a series of trading models which were in place five years ago and the market has moved on,” he said. “For example, we need to look at the thresholds for the large-in-scale waiver in context of what has happened to the average trade size.”
Under MiFID, dark pools can waive pre-trade transparency obligations if orders meet the directive’s large-in-scale thresholds, match at the mid-point of a reliable reference price, are negotiated directly between two countrerparties, or are contained in a on order management system.