January 15, 2014 - New rules governing trading and financial markets in Europe have been agreed by the European Commission (EC), Parliament (EP) and the bloc's national Council of Ministers this week. The Markets in Financial Instruments Directive (MiFID) II stipulations, which have the strength of a Regulation for some aspects in their updated form, creating the alternate MiFIR moniker, seeks to transform the securities market in Europe, as its predecessor did.
The latest MiFID regulation can effectively be split into two segments, with a directive covering the transparency and access to trading venues in Europe and, secondly, an official regulation governing the authorisation and organisation of trading venues and investor protection measures in Europe.
MiFID II includes new rules that seek to limit anonymous venues trading 'dark pools of liquidity' and high frequency trading (HFT), while also encouraging more transparency and competitive practices in the derivatives field. The demarcation of an organised trading facility (OTF), which basically means anything that the regulators missed last time around when creating alternative multilateral trading facilities (MTFs) under MiFID I last decade, is now confirmed and will fall under the MiFID directive elements of the new rules. OTFs operating non-equity instruments will have a lighter regulatory regime than full stock exchange Regulated Markets.
The exact detail and implementation / operational practice of how MiFID II will eventually be rolled out is still to be worked out by the European Securities and Market Authority (ESMA), which is awaiting the imminent translation of the final agreed text from the EC, EP and Council of Ministers into the European Union's (EU) various languages before it can proceed. MEPs in the Parliament will also have to vote this final translated text into legislation before ESMA can get to work on the implementation deadlines and detail, so a good few years' work still lies ahead for the securities sector.
ESMA appointed Insead OEE Data Services, the Tabb Group consultancy and Centre for European Policy Studies at the turn of the year to help it hammer out the technical details.
A draft set of MiFID II technical stipulations will be created by ESMA after gauging initial industry reaction to the European legislators' communique. This will then go out for further securities market industry feedback before a final set of technical standards, likely to be 200 pages long, is produced. Much room for lobbying and alterations still remains, therefore, but the firing gun for MiFID II has now officially been fired.
The stipulations cover investment firms, market operators/exchanges, and data and post-trade service providers in the EU, and are likely to be of intense interest to all financial market participants now that the second 'day of the MiFID' is upon us.
Dark Pools, HFT and Algos Restricted
MiFD II will introduce restrictions on high frequency trading (HFT) and the operation of algorithmic trading (algo) computer programmes by investment firms, with the latter having to be tested and approved by regulators in the future before they are allowed to be plugged into financial markets to ensure that there are appropriate circuit breakers to stop trades if price volatility fluctuates wildly. This measure is intended to limit contagion and technical stipulations to reduce the possibility of 'flash crashes' is also thought to be in regulators' minds. Additionally, all orders and cancellations will have to be immediately retrievable from storage if regulators demand it.
Commenting on the MiFID II communique, the EC Commissioner for financial markets, Michel Barnier, insisted that strict new transparency rules will ensure that dark trading of shares and other equity instruments, which can undermine efficient and fair price formation, will no longer be allowed. "Although I regret that the Commission's proposed ambitious transparency regime for non-equity instruments, such as bonds and derivatives, has not been fully achieved yet, MiFID II still represents an important step in the right direction towards greater transparency," he added.
"The dramatic increase in the speed and volumes of order flows can pose systemic risks," continued Barnier, before pointing to the new rules that ensure safe and orderly markets and financial stability through the introduction of trading controls. "There is also an appropriate liquidity provision obligation for HFT traders pursuing market-making strategies and regulation covering the provision of direct electronic market access (DMA)."
