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Opinion: MiFIR – Flat-Packed Furniture Without the Instructions?

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By Matthew Coupe, director of sales and marketing, Redkite Financial Markets

The proposed Markets in Financial Instruments Regulation (MiFIR) has left me questioning what this piece of European regulation is actually going to achieve.

Will the final legislation give the financial industry a set of clear-cut rules to follow and be accountable to? Or is MiFIR the equivalent of a piece of complicated flat pack furniture, delivered with neither build instructions, a picture of the final product, nor the correct number of screws?

From a trading regulation perspective, MiFIR’s overriding theme is transparency and control. But although the paper touches on the sub-categories of cross-asset risk management, market abuse and best execution, it does not address these issues in any detail.

While the industry widely agrees on the need for improved risk controls and increased visibility in the electronic markets, MiFIR fails to substantiate what is required to achieve “appropriate pre-trade risk controls on order flow”. Surely, any meaningful regulation should identify what these controls are and how they need to be implemented? Or are we to make a best guess and our own choice between the exceptionally easy-to-define order value, order quantity, realised and unrealised P&L, or total consideration limits; or perhaps we’d like to take a leap forward and consider the ability to control shorting and having locates on a pre-trade basis, instead of at-trade?

We’re less in the dark with regards to market abuse, not because of MiFIR, but thanks to the upcoming Market Abuse Directive (MAD) review and the recent ESMA consultation paper on systems and controls. The ESMA paper identifies the types of abuse that need to be detected. However, detail defining what that behaviour is, is still missing. I can’t wait to get my hands on MAD II to see if we get the additional clarity the market so clearly needs, for it to detect, analyse, and also potentially change trading behaviour.

When MiFID I came into effect in November 2007, best execution, was probably one of the greatest unknowns. Four years’ on and MiFIR has added that best execution requires a more quantifiable approach, which can be easily explained to the end client. It also says that regulated markets should substantiate the quality of their liquidity and execution with hard statistics. How, and in what way, it does not say.

That said, MiFIR states that the European Parliament will, in due course, substantiate the technical specifications on some of the above points. So roll on the greater detail, and equip the industry with a step-by-step plan of what to do and what the final product should look like!

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