MiFID II should not adopt a universal approach for addressing faults in market segments, but should be more product-specific in its method, reveals a recent research report written by GreySpark Partners, a London based capital-markets consultancy.
“MiFID II: The Impact of the New European Regulations” has drawn on the European Commission (EC) Directorate General Internal Market and Services consultation paper, “Review of the Markets in Financial Instruments Directive (MiFID)”, along with interviews conducted with regulators, market participants and financial professionals, to deliver an analytical and critical overview of the impending European financial regulations.
The report highlights certain incursions that MiFID II may cause, based on the amendments to MiFID, as outlined in the EC consultation paper. A salient change is that legitimate hedging of positions by corporate and institutional investors will become more expensive and impact liquidity. GreySpark also tackles the transparency requirements that the MiFID consultation suggests, highlighting that its universal approach cannot be applied to all assets, as many of the instruments it covers do not share the same fungibility as, for example, equities. GreySpark has pointed out that it is not clear how this rigid approach to transparency will be measured, and such an approach will not be able to adjust to market movements, that are certain to happen.
Available from GreySpark and Best Execution, who are research partners, the study approaches the proposed developments and requirements from a bespoke market structure, activity and instrument specific perspective. Measuring the impact of proposed changes, key activities such as market surveillance, automated trading, broker crossing and dark pools are at the highest risk of being significantly affected by the proposed changes. Additionally, the report looks into commodity derivatives, cash equities, bonds, listed derivatives, and OTC products, all of which are due to be impacted significantly by the proposed amendments. Supervisory powers will also be enhanced in various areas and products, according to the paper.
Attention is also drawn to the debate around the creation of Organised Trading Facilities (OTFs), visibility on Multilateral Trading Facilities (MTFs), and reporting on dark liquidity for a purpose of bringing transparency on the markets. This will generate a large amount of technology infrastructure investment, creating regulated platforms similar to Swap Execution Facilities (SEFs) that have been created by the US Dodd-Frank regulation.
“This piece of research is both in-depth and timely”, commented Lynn Strongin-Dodds, Editor, Best Execution. “There has been much uncertainty over the consultation proposals and deadlines to meet these – the EC received a huge amount of feedback on MiFID, and subsequently the deadline for delivering the renewed legislation has slipped from April, to July, to October 2011. In the interim, GreySpark’s research provides clear commentary and opinion on what the MiFID II proposals are, and where they fall short. The clarity and in-depth activity-specific approach to the research is just what the industry needs as it is set to become engulfed by a new wave of regulations.”
“Throughout the research process, we have found notable resistance to the proposals,” adds Frederic Ponzo, Managing Partner, GreySpark Partners. “Firstly, the singular approach for all market segments is too blunt, but secondly some of the regulatory changes that are proposed are set to affect the price of hedging, as well as impact liquidity. While the proposals are controversial and the voting is not due to take place until Q3 2012, we are nonetheless aiming to provide those who are likely to be impacted with a concise overview of where the pressure points are likely to be, and how they can start to prepare for the stipulated requirements”