Market participants have expressed their dismay at the direction in which the MiFID review is heading, arguing many of the directive's current proposals ignore the workings of the financial markets and their role in the wider economy.
The comments were made as part of a session at today’s FIX Protocol Limited EMEA conference in London, which examined how to minimise the impact of inevitable regulatory changes.
“The design of capital markets should ensure that businesses can raise money and investors can allocate capital,” said Guy Sears, director of wholesale at UK-based buy-side trade body the Investment Management Association. “This doesn’t seem to have been mentioned in the MiFID texts and drafts we have seen so far.”
Sears cited the treatment of broker crossing networks, which under current European Commission proposals could be classified as organised trading facilities (OTFs) and subject to a stricter regulatory regime. This may include the prohibition of matching orders against proprietary capital and the inability for brokers to control which firms can access their internal venues.
“Capital markets are a cost of doing business for the business,” said Sears. “Asset managers therefore need choice when implementing investment decisions, but this does not appear to be a regulatory driver during MiFID discussions.”
A number of other proposals which could have widespread effects on the way trading takes place were also discussed by the panel, with Stephen McGoldrick, director of market structure at Deutsche Bank, suggesting parts of the initial MiFID II draft unveiled by the European Commission last October “displayed a fundamental lack of understanding of how markets work”.
He pointed in particular to new pre-trade transparency obligations for fixed income markets under MiFID II’s new broader remit, which he said “don’t match the market they are trying to regulate”, and proposals that could force all users of algorithms to periodically inform regulators of the strategies they are using.
“These errors should be acknowledged and regulators shouldn’t be too stubborn to admit earlier drafting errors and come up with something different,” he added.
When it came to implementing new regulation, Denzil Jenkins, head of compliance and regulation at the London Stock Exchange Group, pointed to the power afforded US regulator, the Securities and Exchange Commission, which can implement pilot schemes for new rules. This, he said, helped encourage market innovation.
A recent example of such powers in action was the circuit breaker regime, implemented on a pilot basis after the flash crash on 6 May 2010. The circuit breakers initially imposed a halt on trading in individual stocks for five minutes in the event of it falling or rising 10% or more in the previous five-minute period, but were later changed to a ‘limit up, limit down’ mechanism following industry feedback.
“The European process for new legislation often leaves little room for discretion by national regulators,” Jenkins said. “The US approach allows more latitude and scope to make changes to things as practice bears out. One worry is that we are creating a legislative edifice that might act as a regulatory straightjacket on the industry’s ability to innovate."