Financial markets in Europe are set to undergo a fundamental overhaul, as the European Commission rolls out new rules and regulations covering every aspect of the trade lifecycle, from pre-and post-trade transparency, through to execution and clearing and settlement.
The updated guidance to the four-year old Markets in Financial Instruments Directive (MiFID) touches all corners of the financial markets, from the creation of new types of execution venue, through curbs on algorithmic trading strategies, dark pools and market data pricing, to the introduction of a consolidated tape, and clearing competition. The new regulations are also being extended to bonds and commodities and the scandal-ridden carbon markets.
The Commission says the reforms are estimated to impose one-off compliance costs of between €512 and €732 million and ongoing costs of between €312 and €586 million per year, "a fraction of the costs imposed at the time of the introduction of MiFID".
The broad outlines of the plans have already been leaked and shared among market participants, and the proposals still need to go through the European Parliament and EU member states before they can be transposed into binding legislation, so further revisions are anticipated.
The tome is hefty and impossible to summarise in sufficient detail in a Web news digest. The European Commission has published a FAQ document on the proposals which digs into the meat of the reforms and can be viewed online at Review of the Markets in Financial Instruments Directive (MiFID): Frequently Asked Questions
Industry reaction:
Cyril Théret, chief executive officer, Plus Markets Group: "We operate a regulated market, MTF and derivative trading venue. The Market Operator / RIE status is the most robust category of trading venue type within Europe. We are therefore well positioned to trade a variety of asset classes, including derivatives, on such non-discriminatory infrastructure. We believe that derivatives trading venues should provide non-discriminatory access and PLUS-DX is set up to do this."
Munib Ali, director at PwC: "The burdensome transaction and trade reporting requirements will squeeze trading margins, while proposals to move derivatives onto regulated venues and central clearing will make it more difficult for companies to sell bespoke solutions to clients. Enhanced collateral requirements could further contribute to the decline of OTC trading. The provisions designed to enable greater competition and choice around central clearing come with hurdles that will be contentious, such as the requirement for regulatory approval.
"Investment banks, particularly their fixed income businesses, will feel the effects of MiFID II the most. Severe strain will also be placed on the business models of high-frequency trading and commodities firms, who will incur higher implementation and operating costs in order to meet the heavy control and reporting requirements. High-frequency trading firms will be particularly concerned by having to provide liquidity on an ongoing basis like market makers, revisiting their trading strategies and sharing these with the regulators."
Dominique Cerutti, president and deputy CEO of Nyse Euronext: "Trust in financial markets has continued to deteriorate. This proposal by the European Commission is a significant undertaking to address a range of topics, all aimed at improving the transparency and quality of price formation and investor protection in capital markets...The legislative proposal tabled today goes a long way to restoring transparency and we broadly welcome the proposals made by the European Commission."
Andreas Preuss, deputy CEO Deutsche Börse and CEO Eurex: "We agree with EU Commission's proposal of mandatory trading of derivatives on organized trading venues, and improved trading transparency across a broad range of financial instruments including derivatives. This will align European regulatory efforts with the respective requirements in the US outlined by the Dodd-Frank Act. Further, we support the goal to design rules on organizational requirements, transparency and authorization of OTFs such that there are no loopholes to achieve the desired outcome of more organized trading of OTC derivatives.
Conrad Voldstad, Isda chief executive officer: "OTC derivatives trade infrequently. For example, only 3,600 interest rate swaps are traded each day globally and only half of these are sufficiently standardized to be cleared. In all, we think less than 1,000 interest rate swaps will be traded in Europe on Organized Trading Facilities. Half of these may be interdealer trades and the balance will be divided across hundreds of infrequently traded contracts with different maturities. These trades depend on the ability of dealer firms to make markets, particularly given the large trade size of most interest rate swaps. If you want to protect end users' ability to access these markets, then you need a suitable range of venues on which to trade; limiting what you class as an eligible trading platform for OTC derivatives is not a good move."