A collection of Europe’s most influential trade associations have issued an open letter outlining their thoughts on the ongoing Mifir review, warning that in its current form the regulation could result in a loss of competitiveness for Europe against third parties including the UK.

“With international competition for investment heating up markedly, European legislators need to ensure that EU regulation is helping, and not hindering, capital market growth and participation.”  

“With international competition for investment heating up markedly, European legislators need to ensure that EU regulation is helping, and not hindering, capital market growth and participation.”  

Consolidated tape 

The associations support an “appropriately constructed” consolidated tape (CT), with the aim of democratising access across European markets for a comprehensive and standardised view of European trading. However, the letter warns that “it is impossible at this time” to predict the pricing of the tape, the quality of the data and the speed of delivery, meaning that its use should not be mandatory. It should also be competitively priced, with the associations arguing that the bond tape in particular should be priced on a cost recovery plus reasonable margin basis, stressing that “any additional language around loss of revenue for the bond CT is profoundly misguided and could be open to abuse”.  

Market data costs 

However, the associations’ members do not believe that a CT is the solution to the issue of rising market data costs, claiming that the requirement for proprietary data is “indispensable” in order for market participants to operate – and to comply with regulatory requirements – meaning that there should be no exemptions for CTs.  

“The challenge with high and increasing market data costs must be addressed head-on, including through strengthening of the Mifid II and Mifir requirements, standardisation of pricelists, policies, audit procedures, etc., regardless of the existence of a CT,” argues the letter.  

Volume caps  

The associations also note that some of the existing proposals could constrain the activity of systematic internalisers (SIs), which they believe play a key role as liquidity providers, and any restriction of their activities could be to the detriment of Europe’s competitiveness on a global scale. 

Specifically, the letter highlights concerns around the limitation of SIs ability to trade below certain thresholds or to trade at mid-spread, and of a potential integration of their volumes in the monitoring of the double volume cap (VC). Other proposals could restrict the access to waivers of pre-trade transparency through the lowering of the double volume cap or other limitations on the use of the reference price waiver (RPW) and the negotiated trade waiver (NTW) in the equity space. 

“While these proposals initially aim at increasing transparency and consolidating the price formation process in the EU, we consider that, were they to be adopted, they are most likely to run counter to these objectives and to weaken the attractiveness of EU markets,” said the letter.  

“Alternative venues of execution (dark MTFs and systematic internalisers) provide liquidity services that are critical for end investors and that cannot be substituted by the sole access to lit multilateral venues. As a consequence, the limitation of their activity would be detrimental to investors.”  

It warned that non-EU market participants – that represent a significant portion of trading in EU shares – would as a result be likely encourage the emergence of alternative pools of liquidity in more competitive jurisdictions, such as the UK, in order to offer better execution outcomes to their clients: which could result in a transfer of liquidity from the EU to other markets and a consequent weakening of price formation.  

“Our view is that a removal/suspension of the VC as in the UK would be the preferred option in order to create the needed level playing towards the UK,” it stressed.  

Non-equity transparency 

The associations highlight the unique nature of the bonds and derivatives market, stressing the importance of allowing market makers to hedge their risks as well as to unwind their positions.  

As such, the letter supports the removal of the pre-trade transparency requirement for request-for-quote (RFQ) and voice systems, as suggested in the latest proposal draft. “These mechanisms do not bring any clear value, while increasing the operational complexity for market participants,” said the letter.  

“It is critical that the EU proposal, everything else being equal, does not result in dealers preferring to provide liquidity at a better price in the UK/other third country markets.” 

Other issues 

The associations believe that PFOF should be allowed as long as measures are taken to address transparency, conflicts of interests and best execution issues, and support the decision to repeal the RTS 27 element on best execution reports.  

However, they strongly urge against the proposal to add AIFM/UCITS firms to the scope of entities obliged to report their transactions. “We consider this would have huge detrimental impact on the current regime of the reporting mechanism for investment firms,” said the letter.  

A draft report on the Mifir update is expected from the European Parliament by the end of the month.  

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Earlier this summer, senior EU lawmaker and MEP Danuta Hübner laid out new details recommending further MiFIR amendments in a draft report for the European Parliament – and its firm stance has had the effect of polarising an already concerned industry.

Did the report contain what you expected?  

While many amendments were widely anticipated, we fear that others might not bring the transparency and wider market efficiency they were designed for. 

“While many amendments were widely anticipated, we fear that others might not bring the transparency and wider market efficiency they were designed for.” 

One particular amendment that has caught the attention of some market participants is the exemption rules for the consolidated tape. Widely seen as the central feature of a package of capital markets reforms designed to bring more transparency to the European Union’s fragmented trading landscape, the consolidated tape, to be credible and efficient, needs to be as comprehensive and representative of the EU trading landscape as possible. 

Why was the report’s treatment of CT a concern?  
One of the more surprising proposed amendments coming out of this draft was the proposed exemption of markets that do not contribute significantly to the fragmentation of EU markets from mandatory contribution of prices to the tape. More specifically, the report has introduced the possibility of being exempted from mandatory contributions for markets that represent less than 1% of the total EU average daily trading volume, or do not contribute significantly to the fragmentation of EU markets. It also includes an opt-in option to the mandatory contribution scheme for those exemptible regulated markets (a higher share of the CT revenues should be re-allocated to them). In theory, the idea seems to be to exempt smaller regulated markets of lesser significance at an EU scale, which is, perhaps, a necessary and fair exemption, but in practice, the field of exemption appears to be much broader than that.  

For example, the proposed amendment stipulates that a regulated market whose share exceeds 1% of EU average daily trading volume (ADTV) may also be exempt from contribution if it is the primary listing venue for shares and does more than 70% of ADTV on shares concerned or, if less than 20% of the volumes of these are traded on other venues such as Multilateral Trading Facility or Systematic Internalisers. In other words, if you are an exchange regardless of size, and you have over 70% of the trading volume in a share that you listed, then you won’t have to contribute to the tape. This exemption could be an open door for certain exchanges that are doing significant volumes to be exempted from contributing to the tape.  

What would you like to see instead?  

For the consolidated tape to be up to the EU and end-users’ expectations and needs, the full participation of all exchanges is absolutely critical and must be clearly outlined in the regulation. Otherwise, users of the tape will not have the full picture unless they subscribe additionally to the data feeds of omitted markets. 

This approach to building a consolidated tape would negatively impact its relevance as it would not provide an actual ‘consolidated’ view of the market data. Ultimately, it could undermine end-user confidence in the tape and, by association, any ambitions to build a competitive capital market union. 

What other elements caught your eye?  

Another item worth our industry’s attention in the draft report is the recommended suspension of the double volume cap for five years under the rationale that current limits on the amount of trading that can take place without pre-trade transparency are arbitrary and that other measures are better placed to strengthen lit venues, including increased thresholds for the use of the Reference Price Waiver or higher Systematic Internalisers quoting obligation. This is in contrast to the Commission’s more pragmatic proposal which seeks to reduce the double volume cap to a simplified single volume cap (7%) at the overall Union level. The Commission’s proposal eliminates the current complexity of maintaining both an individual venue cap and an EU-wide cap but retains the aim to limit the level of dark trading in an instrument.  

During the proposed five-year suspension, the report outlines that ESMA will continue to monitor the level of dark trading and be empowered to limit it by restricting the use of the reference price and negotiated trade waivers, if there is evidence that the volume of such trading is undermining the efficiency of the price formation process.

“For the EU to be consistent with its campaign for greater market transparency, it is critical that rules and policies are not motivated by fear of what other authorities are doing.” 

But for the EU to be consistent with its campaign for greater market transparency, it is critical that rules and policies are not motivated by fear of what other authorities are doing, for example the UK. There seems to be some sort of apprehension that when the UK does away with the double volume cap, then we could see significant volumes in European names being executed in dark pools by third country firms. If the EU believes in transparency as a driver of more positive outcomes, then structuring the market accordingly is going to lead to more volumes being attracted to European markets. Doing otherwise and trying to align to third countries with a different approach to transparency is only going to lead to a ‘race to the bottom’, which ultimately won’t benefit investors.  

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The Reconcile.Trade solution provides buy- and sell-side firms with a solution to meet the regulators’ requirement to ‘regularly reconcile front-office trading records against data samples provided to them by competent authorities’, either via a trade repository or an approved reporting mechanism (ARM).

The solution runs on Gresham’s Clareti platform to provide operations and compliance teams with transparency and greater control over the accuracy of reported data.

 “Our clients trust us to provide the most comprehensive regulatory intelligence, but also importantly to give them the operational flexibility they need to achieve their quality, completeness and accuracy ambitions,” said Brian Lynch, chief executive of RegTek.Solutions.

“Gresham are uniquely positioned as a leader in the data integrity domain, replacing legacy reconciliations at top tier firms around the world with their modern, scalable architecture. We are delighted to be partnering with them to expand Reconcile.Trade’s footprint.”

Reconcile.Trade’s first client has gone live with the solution in response to a regulatory investigation of its Dodd-Frank reporting by remediating the gaps in controls identified by the regulator.

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Looking back on 2018 I think we can all agree that we achieved a great amount as an industry.  That being said, I don’t see things slowing down in 2019.  Brexit will obviously be in the headlines and will continue to take up a lot of resource on buy-side, sell-side and execution venues alike.  Regulatory and political developments, particularly on periodic auctions, tick-size regimes, mid-point trading and SIs have the capacity to change market structure yet again in 2019. 

Change is the only constant, but some things have already changed for the better and further forced amendments could only harm the end-investor in the long run.

Eric Heleine, deputy head of buy-side trading desk, Groupama Asset Management

The evolution of the structure of the financial markets will be a new source of complexity for 2019. The liquidity on equities will be impacted by the regulator, who’s already trying to adjust MIFID II side effects, like the SI regime or periodic auctions. The revision of RTS11 and the possible implementation of tick size regime on all band sizes can become a real challenge to find real liquidity.

So, while politicians and regulators want greater transparency in markets, the role of asset managers in the management of European markets is to be improved. The fixed income business also requires a better reading of the available liquidity and its location. In a more volatile market the RFQ should be challenged by the establishment of new alternative liquidity pool where the buyside will become a new liquidity provider.

Scott Bradley, head of sales and marketing, London Stock Exchange Secondary Markets and Turquoise

MiFID II was possibly the most far reaching overhaul of market infrastructure in a generation. As a result, a core focus for 2019 will be managing the lessons learned.  In addition, navigating the “known unknowns” in the market, including those surrounding Brexit, will further highlight the importance of partnerships amongst market participants. 

There will be a continued drive for innovation and decisions based on meaningful data in order to make best execution become a reality. The vast amounts of data generated, collected and analysed through 2018 will need to be employed accordingly in 2019 as competition for liquidity will continue to toughen.

Enrico Bruni, head of Europe and Asia business at Tradeweb

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Responses to ESMA’s latest consultation on derivatives rules under MiFIR – published today – reveal firms are concerned the regulator is too optimistic about the ability to negotiate large trades via trading protocols.

Originally, ESMA had proposed exempting large-in-scale derivatives trades from the trading obligation (TO). However, some respondents to its first consultation said the TO should extend to all trade sizes. The TO requires derivatives contacts deemed sufficiently liquid and cleared via a central counterparty to be traded on regulated markets, MTFs, OTFs or equivalent third-country venues.

Firms that objected include Amundi, which said: “We….do not understand why ESMA has drastically changed its mind on this issue when only a minority of respondents to the previous consultation did not share ESMA’s proposal to exempt larger trades from TO.”

It further criticises ESMA’s statement that “trading venues can offer trading protocols that allow for the private negotiation of large trades, thereby removing any concerns about information leakage.”

But Amundi believes ESMA is moving “too fast” in its belief that trading protocols enabling complex negotiation can be developed in the near future.

It adds: “A more profound assessment of these trading facilities should have been conducted with a proper public consultation instead of relying on some comments that do not reflect our view of the current efficiency of the market.”

Barclays was also concerned about the impact of the TO on negotiations for larger trades, though did not call for them to be entirely exempted from the obligation, provided some compromises are made.

“Simply because MIFIR allows request for quote (and indeed Voice) as a trading system does not in our view preclude the need for such bilateral engagement between a market maker and its client in the case of very large trades,” Barclays said in its response.

It said existing on-venue request for quote systems are not well designed to use as a negotiation process and called on ESMA to review this.

“We can support the extension of the trading obligation to all transaction sizes only if ESMA recognises the permissibility in such cases for an appropriate degree of dialogue / negotiation between the parties. As in the case of the US SEF rule, assuming the mandate applies, the trade must then procedurally be executed on the venue at the previously negotiated price,” Barclays added.

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Torstone Technology has connected to the London Stock Exchange’s (LSE) UnaVista platform as an approved reporting mechanism (ARM) ahead of MiFIR reporting.

Users of Torstone’s Inferno compliance tool will  be able to comply with the transaction reporting requirements under the MiFIR by sending data through Inferno into UnaVista’s ARM.

The LSE’s UnaVista is connected to all required National Competent Authorities (NCAs) in Europe, so firms can comply with reporting requirements in one place.

Wendy Collins, global head of partners at UnaVista, explained partnering with other technology providers “is key to providing a complete service to help financial institutions of all sizes and complexity to comply with the new regulatory framework.”

Brian Collings, chief executive officer at Torstone Technology, added clients using the service “can achieve efficient and cost-effective compliance and gain access to our qualified team of specialists who can assist them in the simplification of their reporting obligations to NCAs.”

Torstone’s testing environment is now available, ahead of MiFIR’s reporting deadline in January 2018. 

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