Open access to clearinghouses and trading venues and the high cost of market data in the European Union have been highlighted by trade associations in their responses to the review of the MiFID II regulation.
The European Commission has been consulting on the review of the MiFID II/MiFIR regulatory framework, which went live in 2018.
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The International Capital Market Association said in its response that open access to market infrastructures was first identified by the Giovannini Group in 2001 as a key element of an integrated EU post-trading landscape and has important benefits.
For example, clearing instruments from multiple venues at a single clearinghouse of choice could lead to substantial netting efficiencies, compared to clearing these at two different CCPs.
“It also has the effect of freeing up collateral, which is an increasingly scarce commodity in today’s financial markets,” added ICMA. “The extra availability of collateral could in turn contribute to more liquid capital markets.”
Open Access could also lead to lower execution costs, contributes to financial stability and create more innovation.
“New and non-vertically integrated trading venues would be prevented from entering the market and thus unable to contribute to a more competitive and a less concentrated market,” said ICMA. “The emergence of competing venues to challenge the incumbent will put pressure on all service providers to improve service levels and to innovate, which would be to the benefit of all market participants.”
The Association for Financial Markets in Europe also said in its response that open access leads to lower costs, deeper pools of liquidity, improved service levels, greater capital efficiency and innovation.
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“Fragmentation often undermines the ability to achieve economies of scale that bring benefits to users of capital markets,” added AFME. “Any further delay to the implementation of the MiFID II/R open access rules must be avoided.”
ISDA, the association for the derivatives industry, and the Futures Industry Association also said in their joint response that their members, who mainly represent clearing members and end-users and some trading venues, would support the implementation of both open access to CCPs and trading venues.
“Members believe that open access will foster competitiveness on European markets, improve risk management and make central clearing more attractive,” they added. “Having open access would increase competition as it would open up the existing vertical silos, to enable products from trading venues outside the siloed group to be cleared by the CCP and vice versa.”
Consolidated tape
The European Fund and Asset Management Association said in its response that the cost of data is “surging” in the EU.
“MiFID II still fails to deliver a consolidated tape and the notion of “reasonable commercial basis” in data cost has been largely overlooked,” added EFAMA. “We therefore call on the Commission to enforce the creation of a consolidated tape."
EFAMA recommended that the Commission should start with post-trade data, which should be part of a consolidated tape offered at a proportionate cost and without mandatory consumption.
ISDA and FIA said in their joint response that a consolidated tape would help brokers to locate liquidity at the best price available in the European markets, and increase investors’ capacity to evaluate the quality of their broker’s performance in executing an order.
“A European consolidated tape could also be one major step towards “democratising” access to “market data” so that all investors can see what the best price is to buy or sell a particular share,” added ISDA and FIA.
They noted that in the US a consolidated tape has been mandated for shares (consolidating pre- and post-trade data) and bonds (post-trade data).
ICMA said in its response a consolidated tape for bonds should be developed at the same time as for equities, rather than an equity tape being developed and delivered first.
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“It is the industry’s understanding that equity and bond consolidated tapes will both face technical implementation challenges, but it is the taskforce’s impression that bond markets have particularly challenging data quality issues to overcome,” added ICMA.
The World Federation of Exchanges, which represents regulated exchanges and clearinghouses, defended the cost of market data in its response to Esma.
WFE said: “The multinational banking groups and high-frequency traders involved in the debate see a consolidated tape as a backdoor to realising their efforts to have more regulatory intervention in the setting of market data prices.”
The association, led by Nandini Sukumar, clarified that it does not support the introduction of a pre-trade consolidated tape as it would create additional costs to the industry and lack a clear use case.
Bond research
MiFID II mandated the separation of research payments and trading commissions, which had traditionally been bundled together.
ICMA continued in its response that in light of the Covid-19 pandemic, the whole bond research unbundling regime may need to be reassessed to stimulate business, finance the real economy, and assist the buy side.
“In particular, there appears to be no perceived benefits for fixed income investors,” added ICMA.
Share trading obligation
MiFID II requires EU firms to trade certain shares and derivatives on EU or equivalent venues, even if most liquidity is currently on venues outside the region.
WFE recommended that third country venues and shares should be excluded from the share trading obligation, especially when investors want to achieve best execution for dual-listed shares.
“Trading third-country shares on third-country markets is of great importance to the European financial market value chain,” added WFE. “Capital flows in either direction between the EU and third countries supports European businesses and investors, and contributes to the efficient allocation of capital.”
The association continued that it regretted the lack of an equivalence determination for Switzerland and the use of equivalence for political purposes.
The European Commission removed equivalence for stock markets in Switzerland in July last year and more than 300 Swiss shares were removed from trading on European Union venues.
“The result of this dispute has not been positive for the competitiveness of EU exchanges or market participants,” added WFE.
AFME also wants the share trading obligation to be revoked.
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“This has had negative effects on end investors, and such impacts could be exacerbated by the possibility of conflicting STOs and restricted access to liquidity pools after Brexit, resulting in investment firms being limited in their ability (in certain circumstances) to deliver best execution to EU investors,” said AFME.
Third party authorisation
Deutsche Börse Group, led by Theodor Weimer, said in its response that requiring self-regulated third country (proprietary) firms, to set up a branch in a new EU jurisdiction would be disproportionate.
“Were they to withdraw from that role, this could considerably constrain the cross-border provision of liquidity on EU trading venues and hence disturb the price discovery process leading to increased volatility, reduced competition in the market, and could eventually even increase systemic risks,”said Deutsche Börse. “Fewer liquidity providers would damage the interests of commercial, financial and industrial users of the markets in particular those managing price risks which are inherent in their physical businesses.”
London Stock Exchange Group said in its response that an equivalence assessment should be to ensure that Esma can reasonably rely on the third country regulators and apply deference where appropriate.
“ However, we believe that some of the listed requests for detailed information (information on the activities of the internal audit function and others), especially if provided on an ongoing/annual basis, appear not to apply appropriate deference and take into account that the third country firm would be operating to equivalent standards and subject to comparable supervision of its activities in its home state,” added LSEG.
Isda and FIA highlighted that that more fragmented markets have resulted from the lack of equivalence decisions on trading venues between the EU and other jurisdictions, and this is likely to be exacerbated when the UK leaves the European Union at the end of this year.
Systematic internalisers
MiFID II banned broker crossing networks and required broker-dealers to set up systematic internalisers in order to provide principal liquidity to clients.
AFME, led by Adam Farkas, continued that the association’s members do not believe that SIs should be compared to trading venues as they simply offer different services.
The response said: “AFME members value the role of the different kinds of execution venues and services, including multilateral venues and there is no desire to see non-exchange flow to represent the majority of execution within equities markets. However, we urge the Commission to recognise the benefits to end investors brought about through the existence of a variety of execution choices, including SIs, dark MTFs, and frequent batch auctions, which provide a valuable and additive source of liquidity.”
Esma Q&As
The European Fund and Asset Management Association also said that Esma’s current approach continuously updated Q&As is burdensome for the wider financial industry.
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“Each new clarification can lead to necessary changes to underlying systems and be time- and resource-intensive,” added EFAMA. “We would therefore strongly suggest making thematic Q&A updates every year, with enough time for the industry to implement these changes.”
