Equity market participants should not underestimate the strength of the political undercurrents that are shaping Europe's evolving financial regulatory framework, Stephen McGoldrick, director of market structure, Deutsche Bank, warned delegates at message standards body FIX Protocol's EMEA trading conference held in London on 1 March.
“We should not lose sight of the fact that this is a political process,” said McGoldrick, pointing out political considerations could have an impact not just on the rules passed in upcoming legislation, but also the powers awarded to regulators such as the European Securities and Markets Authority (ESMA).
ESMA assumed some of its powers as the pan-European regulator for the securities markets at the beginning of 2011, but others are to be defined in MiFID II, a draft of which is scheduled to be presented to the European Parliament and European Council by the European Commission (EC) by mid-May. In addition, the European market infrastructure regulation (EMIR), which lays out a new pan-European framework for over-the-counter (OTC) derivatives, central counterparties and trade repositories, is already being examined and amended by MEPs. The EC has also launched a public consultation on post-trade infrastructure ahead of issuing legislative proposals in June to establish a single regulatory framework for central securities depositories and harmonise key aspects of securities settlement processes.
Referring to organised trading facilities, a new umbrella definition of non-exchange trading platforms proposed in the EC's MiFID II consultation document issued last December, McGoldrick said it would be “very easy” for ESMA to insist on almost all off-exchange trading currently conducted by brokers being included in the new category.
McGoldrick also cited recent comments from MEPs on the social utility of banking services in the aftermath of substantial government bail-outs to illustrate the political context in which regulatory reforms such as MiFID and EMIR are being considered. As post-crisis reforms have gathered pace, many MEPs have sought to prioritise a strong emphasis on consumer protection and market transparency in financial services regulation. Speaking in a debate last year on the new European framework for macro-prudential oversight of the financial system, German MEP Markus Ferber, a member of the European Parliament's committee on economic and monetary affairs, criticised regulation that is “about protecting stock exchange centres and banking structures and no longer about protecting citizens”.
Guy Sears, director of wholesale at the Investment Management Association, which represents UK institutional investors that collectively manage Â£3 trillion in assets, agreed that political scrutiny of financial markets legislation is serving as a “proxy” for debate on wider issues about the proper social function of the financial markets. The outcome, panellists suggested, was an overriding emphasis on market transparency that would limit institutional access to tools and processes that both reduce market impact and the trading costs passed on to end-investors.
While Sears expressed hope that the extension of MiFID to fixed income markets, as planned in the EC's consultation, would result in explicit support by governments and central banks for regulations that support access to liquidity in Europe's debt markets, he added that the present degree of ambiguity in the EC's proposals was causing significant uncertainty among his association's members. “Why would anyone invest in producing a new product in Europe right now?” he asked.
Eleanor Jenkins, head of market structure and liquidity strategy, Morgan Stanley, also highlighted a “level of ambiguity” in MiFID proposals, specifically the volume threshold at which a broker crossing network may be required to be regulated as a multilateral trading facility. However, Jenkins said that proposed changes to the existing MiFID regime for allowing the delayed reporting of equity trades was one of the major concerns of her firm's buy-side clients.
Currently, trades executed on MTFs and regulated exchanges must be published within three minutes, with some large transactions permitted to delay publication by between 60 minutes and four trading days, depending on the liquidity of the share and the size of the transaction. In its MiFID II consultation, the EC proposed that the deadline for reporting trades in real time should be reduced to one minute; almost all other transactions are to published no later than the end of the trading day, with only very large trades that occur late in the trading day eligible for reporting before the opening of the following trading day.
McGoldrick warned that reductions in permissible reporting delays could lead to increased costs for larger trades, while Jenkins asserted that delayed publication trades accounted for less that 1% of Morgan Stanley's overall trading volumes and as such changes to the existing regime would yield negligible transparency benefits while being “counter-productive” to market efficiency. She added that there may be merit in the reintroduction of worked principle agreements whereby brokers formerly reported arrangements to the London Stock Exchange when using their own balance sheet to support a large buy or sell order for a buy-side client.
Recent research from Credit Suisse noted that the proposed changes to the delayed reporting regime in MiFID II could increase premiums for risk trades as traders rush to complete orders before having to disclose them to the market.