The European Forum of Securities Associations (EFSA), in conjunction with members from Spain, France, Italy, Belgium, Germany, Denmark, Poland, and Sweden, this week released an open letter calling for a number of changes to be considered as priorities in any upcoming review of MiFID II by the EU authorities.
“There are some areas… which need recalibration in order to deliver the intended policy outcome and to avoid unintended harm to the market, liquidity, and investor choice,” explains the body.
The letter raises concerns about the systematic internaliser (SI) regime, noting that it has led to a number of firms opting to be Sis purely in order to shoulder reporting responsibility for their clients, while an inability to trade report is a barrier to entry for new entrants. The absence of an official ‘golden’ source of SI data has also led to technical difficulties, claim the trade associations, as available trade data does not indicate in which capacity the counterparty has done the trade, which can create uncertainty around who should report, leading to a risk that neither side publishes the trade, which thus diminishes overall data quality.
“EFSA would strongly support an amendment which allows counterparties to agree contractually who will report, with the existing reporting waterfall providing a backup (and certainty of reporting) in case the counterparties do not enter into such an agreement,” urges the letter.
Market data upgrage
While EFSA supports the concept of a consolidated tape (CTP), the letter stresses that this should not be seen as a solution to the problems of poor data quality or the conceptual flaws and insufficient enforcement of the “reasonable commercial basis” provisions, and reiterates that the establishment of a CTP and its associated costs should not add to the rising costs of market data, which it cites as a major concern for market participants in the EU.
“Lack of clarity around how to this concept should be interpreted as well as the insufficient enforcement mean that market data costs have increased dramatically,” warns EFSA.
Since investment firms are, in effect, forced to purchase market data from each of the trading venues, and since there are no alternatives, in most cases, to the data generated by each venue, there is very little or no competition, which is why the prices keep rising. “The present situation hinders the development of market data services for the industry as well as for clients,” notes the letter, suggesting that competition authorities could be better placed than financial supervisory authorities to monitor and control fair pricing policies.
The trade associations also urge an improvement in the quality of market data, especially regarding completeness of data, classification on financial instruments and liquidity assessment. Other demands include a recalibration or a repeal of the scope of share trading obligations, which EFSA claims is currently too broad, along with a “rigorous consultation process” to clarify and standardise the best execution quality reporting regime.
While there has as yet been no confirmation around the date of a MiFID II review, the European Securities and Markets Authority (ESMA) confirmed in December that it would undertake a “staggered and focused” approach over the course of the year, following widespread concerns voiced by the industry including a position paper issued by the German Ministry of Finance last year which was highly critical of many aspects of the regulatin.
According to ESMA Chair Steven Maijoor, key consultations and review reports are likely to cover the MiFID II transparency regime, including the double volume cap, derivatives trading obligation and systematic internaliser (SI) regime, while ESMA is also currently working on a report assessing the quoting behaviour of Sis in non-equity instruments. The regulator aims to consult on the reports in the first quarter of this year with the goal of submitting them to the European Commission by July 2020.
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