A group of influential finance industry firms – including several global asset managers – have written to the European Parliament and Commission urging them to consider maintaining pre-trade transparency waivers with certain conditions.
The Markets in Financial Instruments Directive (MiFID) II is set to shake up pre-trade transparency waivers, which support the operation of current European dark pools.
European legislators want to reform transparency waivers due to the explosion in use of dark pools since the original MiFID in the hope of promoting price formation in public markets. They are concerned that existing waivers are interpreted too loosely, and are looking to tighten up the rules surrounding them.
The letter’s authors, which include the Investment Management Association, State Street and Fidelity, have suggested a way of enabling the so-called large-in-size waiver, which enables dark block trading provided the trade is of a sufficient size, while still improving price formation on the lit markets.
By implementing a general rule that trading through pre-trade transparency waivers must deliver some price improvement, the alliance of organisations said market liquidity would be maintained, protecting the interests of end-investors, while also reducing the volume of dark pool trading and the use of transparency waivers. It cites experience in Canada where a similar approach saw dark trading cut by more than half.
The letter also called for legislators to take a measured approach to pre-trade and post-trade transparency in non-equity markets, taking into account liquidity, participants and market models before setting the conditions of any waivers.
Interoperability was also mentioned, with the group calling for the European Commission to push for the delivery of open access requirements across all markets.
“The original MiFID provided investor choice in the trading of equities, which led to clearing choice and reduced investors’ and companies’ cost of capital. The MiFID review must continue this work, extending the MiFID reforms and the benefits of choice to non-equity markets,” the letter said.
MiFID II is currently in the trialogue stage of development, with the European Commission, Council of the European Union and European Parliament getting together in a series of meetings this year to hammer out the final text.