Analysis: MiFID II – the new transparency regime
Having been a fixture on the regulatory agenda for years, the go-live date for MiFID II is now rapidly approaching. On 3 January 2018, the second iteration of Europe’s Market in Financial Instruments Directive and Regulation will bring in sweeping changes to the financial markets on topics such as product governance and suitability, transaction reporting, commodities position limits and transparency.
The transparency regime in particular has been subject to significant discussion and comment from market participants, professional bodies and trade associations such as the International Swaps and Derivatives Association (ISDA) and Association for Financial Markets in Europe (AFME). It will require significant investment for investment firms for implementation but also to run the services required.
With debate ongoing around the impact this will have on trading activity, what is the new transparency regime and what will it mean for investment firms and investors alike?
The transparency requirements are divided into pre trade and post trade to give full front to back information of the trade life cycle. The intention of the regulator is provide investors with all the information they require in order to make an informed decision on where to trade, how to trade and who to trade with. It will also allow investigations into market abuse to be conducted on a forensic level with a plethora of market data information available.
Pre-trade transparency applies to the operators of trading venues (exchanges, multilateral trading facility or organised trading facility) and also to systematic internalisers. The systematic internaliser regime was first seen under MiFID I but significantly widened in product scope under MiFID II, and requires investment firms who trade on their own account when executing client orders outside a trading venue in a sufficient size to publish quotes in a public forum. This can be done via a website, on an exchange or via a market data provider under an authorised publication agreement.
The quotes are only executable for clients of the investment firm, however their publication will allow investors using other providers to compare the prices being charged on other platforms. The quotes must be up to a standard size set by European Securities and Markets Authority (ESMA), for example €10,000 for shares, and are therefore clearly aimed at providing retail investors with a new level of transparency.
Consequently, it is expected that investors with multiple trading accounts will take advantage of these prices, as well as the expansion of investment firms’ best execution desks offering order routing to the best price on either a trading venue or third party systematic internalisers.
In addition, price competition is likely to be ever more fierce; meaning that investment firms will be constantly looking to ensure they are offering the best price on as many instruments as possible…
By Simon Abbott, senior regulatory manager, equities markets and commodities, Commerzbank London
This is an excerpt. The full article is available in the June 2017 edition of Banking Technology.