The European Commission will impose a non-negotiable regulation on member states, in addition to its planned revisions to MiFID, to ensure its ideas for competitive securities markets come to fruition and that transaction data is reported consistently.
The second iteration of the EC's Markets in Financial Instruments Directive (MiFID) will be accompanied by a separate regulation which gives member states no room for interpretation in areas including derivatives reform, post-trade competition and organised trading facilities (OTFs).
The draft regulation currently includes rules on pre- and post-trade transparency and related data reporting standards, new powers for pan-European securities watchdog the European Securities and Markets Authority (ESMA) to coordinate actions of national regulators and over-the-counter (OTC) derivatives reform.
Whereas European directives allow some latitude when during transposition into national law, every member state must accept regulation without interpretation.
Once the regulation is passed by the European Parliament and the Council of the European Union, it could be enforced immediately, overriding all national laws.
By comparison, the MiFID II directive will cover authorisation and organisational requirements for investment firms and market operators, conduct of business and investor protection rules, small- and medium-enterprise markets and the powers of national regulators. The directive will require member states to adapt national law in order to achieve its objectives.
Although MiFID became effect in most European Union member states in November 2007, a number of countries dragged their feat in introducing key elements of the directive, such as facilitation of trading venue competition.
“The EC is increasingly using regulations. It seems as though they are becoming exasperated with member states' implementation of different directives,” Peter Snowdon, partner, financial services at Norton Rose, told theTRADEnews.com. “It is also possible that the European Commission wants some uniformity so that when transaction data is produced by firms at an individual member state level, it is the same in each country.”
Breaking down vertical silos
The new regulation proposes additional measures to remove commercial barriers to competition in the clearing of securities. It will require central counterparties (CCPs) to accept clearing of securities on a non-discriminatory and transparent basis, regardless of the trading venue on which a transaction is executed. CCPs can only deny access under certain conditions outlined in the regulation, such as access would threaten “the smooth or orderly functioning of markets”.
Trading in standardised OTC derivatives must move to exchanges or electronic trading platforms, according to the regulation. Eligible derivatives must only be traded on regulated markets, MTFs or organised trading facilities (OTFs).
An OTF is defined as “any system in which third party buying and selling interests meet”, covering both bilateral and multilateral systems, discretionary or non-discretionary.
While other venues must offer access to anyone willing to trade on their systems, some OTFs can refuse access to prospective clients and have discretion over how a transaction will be executed. OTFs could have a best execution obligation towards their clients and can choose to route transactions to other firms or platforms for execution. OTFs are prohibited from trading against proprietary capital.
The regulation also extends the rules of transparency regarding pre- and post-trade to “equity like” securities, such as depository receipts, exchange-traded funds, certificates and other similar securities.
For investment firms acting as systematic internalisers (SI), a minimum quote size will be introduced and two-way quotes will be required. Post-trade transparency rules identical to those applicable to on-venue trades are proposed for SIs, to apply to all shares.
New powers for ESMA
ESMA will be handed new powers to temporarily prohibit or restrict the sale of certain securities if it believes such sale threatens the “orderly functioning and integrity of financial markets or the stability” of the EU.
The EC held its first consultation on MiFID II from December 2010 to February 2011. Final proposals were expected to be presented to the European Parliament and the Council of the European Union by the end of Q1 2011 but were delayed.
Most expect the final legislation to be officially presented on 21 October but some have suggested the directive and separate regulation could be delayed for a fourth time until November.
The Commission advises the drafting process is not yet complete and its content could change.