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.
“The ongoing review of MifidII/Mifir is an important moment for the future success of the Capital Markets Union project,” said the associations: including the European Fund and Asset Management Association (EFAMA), Germany’s fund association BVI, the Nordic Securities Association (NSA) and the European Forum of Securities (which includes securities associations from France, Spain, Italy, Denmark, Belgium, Poland and Sweden).
“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.