15 February 2011

UK response to the Commission Services' consultation on the Review of the Markets in Financial Instruments Directive

MIFID has been decisive in strengthening the Single Market in wholesale financial services, and the Commission and EU should be proud of its success. The abolition of the concentration rule has allowed for alternatives to conventional stock exchanges to emerge, fostering greater competition among trading venues. This is generally recognised as having driven down trading charges and stimulated innovation.

These changes have also brought challenges. One consequence of competition has been the fragmentation of equities trading, which in turn has given rise to difficulties in data consolidation. Such issues need to be addressed if MiFID‘s clear single market and competitive benefits are not to be compromised. New technological developments and market practices have also emerged, partly to deal with the challenges of this fragmentation but also in response to the legislative framework itself.

Given these developments, the UK agrees it is appropriate to assess whether and how the MiFID regime needs to be adapted to ensure resilient and sound financial markets. We also need to consider how elements of the MIFID review fit in to the international regulatory reform agenda, led by the G20, in response to the financial crisis. As we develop our own definition of suitable platforms in Europe, building on international agreements, we should remind ourselves of the objectives of the G20 – mitigation of systemic risk, enhanced transparency and added protection against market abuse.

The UK considers that the MiFID review provides an opportunity to:

- contribute to the EU's delivery of the G20 commitment to enhance transparency, mitigate systemic risk and protect against market abuse;

- strengthen the quality and consolidation of post-trade information, as a key step in mitigating the risks from market fragmentation. The private sector should play the lead role in delivering this outcome, within clearly set parameters;

- strengthen further and develop the EU regulatory framework, taking account of the global dimension. The current MiFID arrangements for the treatment of third country providers have worked well. The UK does not support the imposition of a new regime for granting access from third countries to EU markets only on the basis of a strict equivalence assessment;

- ensure that MIFID continues to provide a robust basis for competition between different types of trading venue. The UK supports delineating as a new type of trading venue those types of OTC trading mechanism which have significant functional overlap with Multilateral Trading Facilities (MTFs). This includes those that would be suitable for on-venue trading of OTC derivatives. But it does not make sense to try to characterise broad swathes of OTC trading as taking place on an "organised trading facility", as some of the systems that would appear from the consultation document to fall into this category are not venue-like;

- enhance market transparency in non-equity markets, through the introduction of post-trade transparency requirements. Such requirements will need to be calibrated carefully and based on detailed evidence and impact assessment so as not to damage liquidity in these markets, recognising that risk capital plays a significant role in supporting liquidity;

- ensure that regulators have the information needed to be able to police markets effectively and ensure their integrity. A strong system of transaction reporting should be at the heart of such information, but the costs and benefits of collecting such reports need to be carefully assessed in each case. In some markets - such as commodity derivatives - position reporting is likely to be a more effective tool;

- ensure that our markets are resilient and robust in the face of new technological developments. We need to take account of the benefits which these changes - such as automated trading - have brought, while ensuring that regulators have the appropriate tools to be able to address any risks; and

- ensure that commodity derivative markets provide robust and consistent price discovery mechanisms for the underlying commodities, and are sufficiently liquid to enable participants to hedge and manage their risks. However, there is no evidence that financial market regulatory tools can be used to control systemically commodity prices, and it would therefore be a mistake to develop policy proposals on this basis;

- reform conduct rules to ensure that clients are better informed about the products and services they are offered and tackle the potential for remuneration set by product providers to bias investment advice.

Full response

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