Changes to the regulation of broker crossing networks (BCNs) could curb some common trading practices, but further clarity is required to fully assess their impact on institutional investors.
In a webinar hosted by theTRADEnews.com, Caleb Wright, head of EMEA equities strategy and market structure at Bank of America Merrill Lynch, explained that the inclusion of BCNs in a new category of trading venue – organised trading facility (OTF) – could rule out a wide variety of activity currently conducted within BCNs.
According to recent drafts of proposed legislation, venues regulated as OTFs – including BCNs – would not be able to trade against proprietary capital and would be subject to substantially different reporting requirements than other venues, such as multilateral trading venues (MTFs).
The new OTF category is to be created under the second iteration of the Markets in Financial Instruments Directive, widely known as MiFID II, to capture trading venues hitherto unregulated. As well as BCNs, the new category is intended to cover trading venues for OTC derivatives.
“While in broad terms, it is a good thing to bring clarity to what can – and cannot – be done in crossing networks, there is definitely further work to be done on understanding how the new regime will change activities clients find valuable today,” said Wright.
Wright’s comments were based on a draft of MiFID II distributed throughout the industry in September as well as the European Commission’s initial consultation document. A further draft, dated 7 October, has been seen by theTRADEnews.com, which confirms the EC’s proposals on trading venue regulation. A final draft is expected to be presented to the European Parliament and the Council of the European Union on 19 October.
Wright added that further clarification was also necessary on draft proposals to standardise pre- and post-trade transparency requirements for trading venues. “Ideally, the new rules will help the market take confidence from the greater standardisation and harmonisation of dark pools, whilst preserving their current value proposition,” he said.
At present, dark trading in the context of MiFID is a spectrum comprising BCNs, systematic internalisers (SIs) and MTFs. Pre- and post- trade obligations vary and vagaries in the interpretation of the rules have led to what many believe is a confusing array of different venues. While definitions and obligations regarding trading venues are promised under MiFID II, the September draft did not fully crystallise these.
During the webinar, Wright also welcomed plans under MiFID II to establish a robust framework for post-trade competition among central counterparties (CCPs). In particular, the Commission seeks to ensure that securities trading platforms can access clearing services from any CCP, with CCPs able to request trade feeds from any platform, so as to offer services on any flows they choose.
Noting MiFID II’s remit beyond securities, Wright hoped that current proposals would increase consumer choice by lowering barriers to entry in trading and clearing in Europe’s financial markets, while also reducing systemic risk. “If clearing is not so heavily concentrated among a small number of CCPs, this could lead to less systemic risk,” he said.