October 20, 2011 6:45 pm

Mifid II proposals: early reaction

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A round-up of the initial reactions from market participants to the publication of the proposals to update the Mifid directive governing European financial markets

The European Commission on Thursday unveiled a series of wide-ranging and tough measures designed to shake-up financial markets, crack down on high frequency trading and extend its regulation of the equities, commodities and vast off-exchange derivatives markets.

Michel Barnier, commissioner for internal market and services, European Commission

“We want to be reducing and mastering the risk” and “put an end to the reign of over-the-counter and opacity.” The proposals will “increase EU credibility” “and make sure others internationally can follow us.”

Dominique Cerutti, president and deputy chief executive of NYSE Euronext

“Trust in financial markets has continued to deteriorate. 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 chief executive of Deutsche Börse and chief executive of Eurex

“We support the goal to design rules on organizational requirements, transparency and authorization of organised trading facilities (OFTs) such that there are no loopholes to achieve the desired outcome of more organized trading of over-the-counter derivatives (OTC).”

“The higher the degree of organized trading, the higher the likelihood that these products can be facilitated by central clearing and trading infrastructures and the lower the degree of systemic risk,” he added.

Guy Sears, director, wholesale at the Investment Management Association

“We wanted a Mifid review because there was unfinished business. Certainly on the consolidated tape, definitely on just how some of the transparency works and the different market structures compete with one another. The proposals are very broad in their approach, there is no detail on the transparency. In terms of the agenda that Mifid’s set and the issues it’s coveting it’s very welcome, they haven’t shied away from anything.”

For ordinary investors: “There could be improved costs certainly with the [consolidated] tape and the data. If they get this right that may lead to reduce costs and better visibility of the market.”

Simon Lewis, chief executive of the Association of Financial Markets in Europe

“For pre-trade reporting, blanket transparency obligations across non-equity markets are not the correct starting point, as these fail to take account of the high levels of transparency that already exist and are likely to damage liquidity.”

“The definition of organised trading facility needs to be carefully considered so it does not unduly restrict various types of important market making and trading activities.”

Conrad Voldstad, chief executive of International Swaps and Derivatives Association

“The EC’s stance on organised trading of OTC derivatives goes well beyond the spirit of the September 2009 G20 commitment that OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate.”

“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.”

Matthew Fell, Confederation of British Industry, director for competitive markets

“Businesses of all sizes rely on the financial markets to raise finance and to manage their risks and balance sheets. It’s important that new regulations provide businesses with the right level of protection and help maintain a well-functioning and efficient market. But they must not affect firms’ ability to raise funds from the market or access the products and services that they need.”

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.

“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.

Oscar Reyes, Carbon Trade Watch

“Treating carbon as a financial instrument is a welcome recognition of the problems in this market, but it is no panacea. Emissions trading has not driven investments in cleaner energy and there is no sign of it meeting environmental goals, as the latest carbon price slump shows. The exemptions remain too broad to really rein in speculation, particularly by the energy firms that are the main traders on this market. Emissions traders also got off lightly when it comes to the setting of position limits.”

Peter Green, partner, capital markets practice, Morrison & Foerster law firm

“Mifid II is the “quiet man” of the regulatory response to the financial crisis. Its tentacles will reach into every corner of financial markets. Notably, the draft retains most of the major changes proposed by the EU Commission in the previous consultation paper, some of which are a cause for deep concern in the market.

“The move to regulate OTFs is a huge shift as it will put a wide range of broker crossing systems under the spotlight and significantly extend the scope of Mifid over certain financial transactions. A politically charged proposal which is likely to be hotly debated is that clearing houses must accept trades executed on any venue. Equally, trading venues will be required to provide open access to any central counterparty that wants to clear financial transactions executed there, breaking provider strongholds on both sides.”

Damian Carolan, regulatory partner, Allen & Overy

“Whilst choice and competition in execution venues may be encouraged in some respects, that choice may come at the cost of flexibility. There will be far less scope for market users to decide how and where to execute their business most effectively.”

Fragmentation of liquidity and pricing sources, which was an unintended consequence of Mifid the first time round, must continue to be a concern as Mifid II adds yet more classes of regulated venue (the new OTF) and applies regulated trading structures to more markets. Integrated vertical trading and clearing silos are best placed to profit from the push towards regulated trading, even if attempts to force open up access survive in the final legislation.”

Imogen Garner, senior associate at Norton Rose

“It’s definitely worth noting that some very significant powers are being given to ESMA, and we’re seeing this in much of the financial markets legislation coming out of Europe at the moment. At the same time, national regulators are seeing their freedom and flexibility to govern their domestic markets reduced.”

Matteo Cassina, president, Citadel execution services

“The original objective of Mifid was to protect the retail investor and we believe that the latest draft of Mifid has fallen short of this goal. While the principle of best execution is reiterated in Mifid II, it is not included in Mifir which means that once again best execution is a principle, not a rule and therefore open to interpretation at the national level.

What is important is that the cost of pan-European data does not remain beyond the reach of ordinary retail investors and thus continue to prevent them from understanding whether best execution is being achieved.”

Alex McDonald, chief executive of Wholesale Market Brokers’ Association

“The central Iimit order book method inherent in regulated market and MTF environments is inadequate to protect the hedging and risk management needs of end investors. The WMBA fully supports the ability of its customers to serve the institutional and investor communities by preserving current hybrid execution methods.

Sharon Bowles MEP, chair of the European Parliament’s Economic and Monetary Affairs committee

“When it comes to transparency, you have to keep in mind - who is it for? Accordingly, I welcome the sensible proposals to exclude large-in-scale operations from pre-trade transparency requirements because if these were to be imposed, there would be detrimental effects on trading and liquidity in the markets, which is not a good outcome for anybody.”

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