Concerns exist that MIFID has not worked well or fulfilled expectations. The report presents cases such as OTC trading in cash equities where it has been asserted that OTC trading in equities is unregulated, untransparent and increasing.
Areas requiring thorough evidence-based review
In some areas there have been concerns that MIFID has not worked well or fulfilled expectations. In considering such cases it is important for the EC to proceed on the basis of factual analysis, and to be aware of the effect of legislation in promoting or stifling competition between different groups of market infrastructure and service providers.
Examples include:
· OTC trading in cash equities: It has been asserted that OTC trading in equities is unregulated, untransparent, and increasing. In fact OTC trading continues to play an important, and broadly steady, role in markets, though published Thomson Reuters data suggest that its share of European cash equity trading has declined recently. Investment firms are thoroughly regulated under MIFID in both their business and market conduct. Post-trade transparency provides (subject to the necessary improvements noted at (b) above) sufficient information to meet market needs.
· Automated Crossing activities: It has been asserted that broker crossing systems (BCSs) represent a substantial, growing, unregulated, and untransparent sector of the market. In fact, BCSs are an example of the benefits that technology has brought to market participants. Simply an automation of previous more manual processes, they enable firms to find liquidity (an important element: certainty of execution) to execute clients’ large trades which are not appropriate for pre-trade transparency. The investment firms which do this business are thoroughly regulated, in particular by best execution and conflict management rules, and the trades assist broader market price formation, as they are promptly reported post trade. While BCSs represent a small percentage (low single figures at most) of total volume, it is nonetheless essential not to impede the capacity to execute large size orders.
· High frequency trading: We consider that high-frequency trading is a legitimate trading strategy which contributes liquidity to the market. Any policy focus should be on the objectives of high frequency trading and how it operates, in particular whether there is discriminatory access to published pre-trade transparency information (‘flash quotes’), or whether there are inadequate controls, not on high frequency trading per se.
· Client categorisation: Following the financial crisis, there have been comments that MIFID categorisation does not adequately protect certain customers. It has been suggested, for example, that more clients should be treated as retail when trading in complex products. It is important for investor protection to be well calibrated to investor needs. Less differentiated client protection would make trading more costly for clients, limit investor choice, and could result in regulatory focus shifting away from protecting vulnerable clients who need it most. The retail sector already includes a significant number of high-net-worth individuals, small corporates, trusts, and charities, who nevertheless have experience and expertise in using these markets. Certain clients that fall into the retail category receive maximum regulatory protection even though they have significant expertise: this applies in particular to specialist expert entities that are constituent parts of large groups which qualify as professional clients, but where the specialist entity itself, because the size tests are based on the company rather than the group, cannot be automatically classified as professional. MIFID already provides for clients to seek a higher level of protection if they need it, and many do so. There is no consensus on the meaning of the term “complex products”. More importantly, there is no obvious connection between the risk profile of a product and its complexity, which could lead to complex, risk-reducing products being replaced by riskier, less complex products.
© AFME
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