The European Parliament’s Economic and Monetary Affairs (ECON) committee, which began its leg of the MiFID review with a stakeholder meeting last week, is likely to reignite the debate surrounding the new category of venue designed to capture broker crossing networks (BCNs).
The new classification, termed an organised trading facility (OTF), was introduced by the European Commission in its final proposals for MiFID II to capture banks’ internal trading platforms, which are not recognised by the current directive. OTFs would also encompass new platforms that will be created as more OTC derivatives migrate to an exchange-traded environment under global regulatory efforts.
However, during the 5 December ECON committee meeting, some participants voiced doubts on the merits of introducing another trading venue classification that would sit alongside the directive’s existing regulated market, multilateral trading facility (MTF) and systematic internaliser categories.
“You can try to create all the new trading categories in the world, but if you leave the back door open, OTC trading will continue to grow – market players will find ways around the definitions,” said Dominque Cerruti, president and deputy CEO at exchange group NYSE Euronext during a presentation to the committee. “We know today that OTC contains things that it shouldn’t, notably the activity of bank crossing networks and lots of small trades.”
An alternative, he suggested, would be a legal definition of the types of trades that constitute OTC trading activity.
The proportion of European equity trading activity conducted off-exchange and the activity conducted by broker crossing networks have been the subject of a long-running feud between brokers and exchanges since the review of MiFID first started. While exchanges maintain that trading in BCNs should be governed by the same rules that capture MTFs and regulated markets, brokers say crossing engines comprise part of their obligation to offer best execution to clients. The current version of MiFID recognises brokers’ best execution duties by enabling OTFs to match orders on a discretionary basis.
“Prohibiting all trading venues from imposing discriminatory access standards and order interaction logic are valuable standards that help the EC to reach its goal of achieving a seamless market despite liquidity fragmentation,” says Burçak Inel, deputy secretary general at the trade body the Federation of European Securities Exchanges. “The question is, would the OTF regime have the effect of making some of the rules governing MTFs optional?”
Inel added that there was a need to study further the impact of allowing brokers to match orders in their BCNs on a discretionary basis, irrespective of whether the broker was subject to best execution obligations when considering which external venues orders should be routed to.
Kay Swinburne MEP, who was also at the ECON meeting, has previously stated in an own-initiative paper published last year that the activities of BCNs should be recognised under MiFID and that BCNs should convert into MTFs if they reach a certain volume threshold. Markus Ferber MEP, the ECON committee’s rapporteur for its reading of MiFID, previously voiced his concern to theTRADEnews.com, that the introduction of new categories for trading could create new loopholes for banks to exploit.
Selected industry representatives making presentations to the European Parliament’s ECON committee also included Karel Lannoo, CEO of think tank the Centre for European Policy Studies, Jean-Pierre Jouyet, chair of French regulator the Autorité des Marchés Financiers and Verena Ross, executive director of pan-European securities regulator the European Securities and Markets Authority.