NOW THE DUST HAS SETTLED…
The political dust may have settled on the MiFID II agreement but the end game is still not in sight. Regulators are now tasked with ironing out the various technical details and few expect implementation to be seamless.
Firstly, incorporating the different political agreements that have been reached is going to be a monumental task and could take weeks. Once the text is finished, it will move into ‘level 2’ discussions, which will largely be handled by the European Securities and Markets Authority (ESMA) and allow the industry further opportunities to wield their influence. The final version could be as long as 700 pages which will then have to be pored over by legal team at the European Commission and translated into 24 different languages before a plenary vote in the Parliament.
There are also still areas of debate most notably the volume caps on dark trading. The proposals suggest placing a limit on the total amount of unlit trading in an individual stock to 4% for each venue and 8% as a whole across European regulated markets and MTFs. Current estimates from TABB Group put total European dark trading at around 11% of equity trades across the full spectrum of regulated markets, MTFs and broker crossing networks (BCNs). However, BCNs will be banned under MiFID as the equivalent organised trading facility (OFT) category created by the legislation will not be allowed to trade equities.
One of the issues is that the thresholds are arbitrarily set and many see them as unnecessarily restrictive. In addition, it is unclear how this rule will be enforced given the lack of a consolidated tape which can accurately and reliably spew out the trade data across the trading platforms. Ironically, this dilemma is bringing the intensely competitive broking community together in search of a solution to minimise the potentially damaging impact a cap could have. One alternative being bandied about is imposing a minimum size for dark pool orders that incrementally increases as trading nears the threshold.
Another hot topic is derivatives trading and those OTFs, which must be multilateral with restrictions on the use of own capital by OTF operators such as broker-dealers. While this will mean a more neutral playing field, there are questions over the liquidity as many of the instruments traded on these venues have relied on broker capital or inventory. This could depend on the derivative contracts that ESMA deems suitable.
It is not surprising perhaps that against this backdrop, the target date for 2016-2017 could slip.
Lynn Strongin Dodds, Editor.
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