With the ratification of the Lisbon Treaty of 2007 very much a live topic across Europe following Ireland’s referendum last week, it is worth noting that European financial regulation over the past decade can also trace its roots to a summit held in the Portuguese capital.
An explicit aim of the European Commission since the European Council (i.e. Europe’s heads of government) agreed the Lisbon Strategy is 2000 has been the creation of an economy of sufficient size, coherence and flexibility to rival the United States. Financial services reform has been critical: if Europe’s financial markets can provide services to individuals, companies, investors and governments on a pan-European basis, a more effective allocation of capital would help drive higher levels of GDP growth in the region.
Since then, the European Commission has swept away national boundaries, regulations and institutions, replacing them with new pan-European structures and mechanisms. For example, national payment instruments, bank account numbers and clearing houses are being replaced by the Single Euro Payment Area and the Payment Services Directive. But in building a financial infrastructure to compete with the US, Europe has inevitably taken its own path. Just as the European Central Bank weighs up interest-rate decisions using slightly different criteria to the US Federal Reserve, so MiFID has taken a slightly different route to its US counterpart RegNMS.
Although MiFID replaced a previous European legislation, the Investment Services Directive, it also aimed to recreate large elements of the US equities market infrastructure in Europe. MiFID facilitated the introduction of alternative trading platforms (lit and dark) to compete with existing exchanges and codified best execution for equity trading (albeit deviating from the simple but effective US equation: best execution = best price).
But MiFID also left out a number of the building blocks that seem fundamental to the operation of the US’s national market system. For example, Europe has no standardised equivalent of the US’s national best bid and offer, which is calculated by the US Consolidated Tape Association based on every quote message it receives from every participating trading venue. In the US, brokers are required by the Securities and Exchange Commission to demonstrate that they have made available to investors the best bid and offer price quoted for a stock at any given time. Nor of course, has Europe instigated a consolidated tape, a single data feed carrying reference prices for equities to market participants based on actual trades.
This latter has been, perhaps, the biggest bugbear of Europe’s buy-side since MiFID’s introduction. Competition between venues may be narrowing spreads, but without a single price source it is a lot harder to identify which execution options represent most value. For the trader, what is the price level against which pre- or post-trade analysis should be benchmarked? For the portfolio manager, how is it possible to be certain how a portfolio has performed relative to the market? For the quant, what reference prices should be fed into models for back-testing purposes to ensure accurate performance in live market conditions? And for the sell-side, particularly mid-tier brokers, the requirements are just as diverse.
Through CESR (Committee of European Securities Regulators), the body charged with ensuring harmonised implementation of regulations across Europe’s securities industry, the European Commission has been collating feedback from market participants on aspects of MiFID’s impact. But the reform process is slow and complex. At a recent roundtable held by Thomson Reuters in London it was suggested that Europe’s competition rules could be invoked to bring all trading venues in the region on board to create a standardised approach. In the meantime, market-led solutions are being developed to meet the evolving requirements of market participants.
As well as its association with this month’s TRADE Poll, Thomson Reuters is consulting with market participants to clarify their consolidation needs and workflow with the aim of establishing a set of standards that the firm intends to share across data and solution vendors. Unlike Irish referendum voters, participants in this poll or more in-depth research can also draw comfort from the fact there is no wrong answer!
To vote in this month’s poll on the consolidated tape, please click here