Market participants reveal their key concerns
with European policymakers’ latest attempt to
harmonise and regulate cross-border trading
After three years of politically fraught deliberation, the
second version of the Markets in Financial Instruments
Directive (Mifid II) has been announced. The ultimate agreement
marked the biggest shake-up of Europe's securities markets
since the 2007 global financial crisis.
Mifid II was approved 'in principle' at a meeting between
the European Parliament, European Commission (EC), and Council
of the EU on January 14. The rules are intended to address the
market fragmentation caused by the original Mifid directive,
shine regulatory light on the over-the-counter (OTC)
derivatives markets, and curb high-frequency trading.
Michel Barnier, the EU's internal commissioner, hailed the
rules as a key step towards establishing a safer and more
responsible financial system, and restoring investor confidence
in the wake of the financial crisis.
|What aspect of Mifid II concerns
you the most?
But the final package has caused rumblings of discontent
from some market participants, who are quick to point out a
litany of problems ranging from the legislation's timing, to
how it will impact a number of European cities' status as
global finance hubs.
Taking that as its theme, IFLR polled the market on what
aspect of the complex reform package is causing the most
Gaining 28% of the vote, the majority of respondents cited
transparency provisions as their biggest headache. According to
Morrison & Foerster partner Peter Green, the impact of this
issue on liquidity and cost to investors is a key concern.
"Mifid II represents a significant change in the regulatory
approach," he said. "The increased transparency provisions, in
conjunction with the increased scope of market infrastructure
subject to regulation, will have a significant effect on the
"We could see the liquidity of certain products
significantly reduced as a result of these provisions," Green
John Serocold, the International Capital Market
Association's (ICMA) head of secondary markets, also cited the
transparency provisions as a key concern. "An important issue
for the ICMA is how cross-border capital markets are going to
be affected by pre- and post-trade transparency," he said.
"What we still don't know is where the levels are going to be
set for dealers to commit to the market pre-trade."
Because liquidity varies over time, Serocold noted the need for
a sensible regime, both pre- and post-trade, that adjusts to
"The EC could
say that nowhere is equivalent because nowhere does it
exactly like us"
According to Serocold, given the amount of system change
that Europe's securities market will have to digest over the
coming years, it's key that the programme provides legal
certainty in good time to allow for technological development
Of the 11% of respondents who voted for a factor not
included on IFLR's list of answers, many noted the problems
caused by third country rules.
Under Mifid II, non-EU firms providing investment services
or activities to professional investors will be subject to an
equivalence regime. "They will have the benefit of being able
to passport their services across the EU, but only if the
European Commission deems their jurisdiction equivalent," said
According to Serocold, the rules risk politicising the whole
market access issue: "The EC could say that nowhere is
equivalent because nowhere does it exactly like us."
Moreover, Green noted that many services are provided by
entities outside of the traditional US–Asia rubric,
such as the Middle East. "It is unclear when, and if, the EU
will be in a position to determine equivalence in relation to
many important jurisdictions, including some in the Middle
East," he said. "This could have an adverse effect on
Jeremy Jennings-Mares of Morrison & Foerster agreed with
concerns over third countries. "The rules are tight for non EU
firms trying to operate in Europe and this could result in some
tit for tat legislation" he said.
The ability of regulators to understand and analyse complex
algorithms attracted just six percent of the vote, proving to
be the aspect the market was least concerned about. But one
anonymous source conceded that regulators would need to be well
equipped to understand the purpose and effect of the advanced
Twenty-two percent of respondents chose caps to off-exchange
trading, with the remaining 33% highlighting the new definition
of 'financial instrument' as their biggest concerns.
"There's a huge amount of work to be done, and there's a
huge spend," said Serocold on Europe's final reform package.
"All that work has got to be done while carrying on with
business as usual."
IFLR publishes its monthly poll question on its
homepage and Linkedin group page. Throughout the month,
IFLR's editorial team gather the responses and
interview selected respondents.
Don't forget to look out for our poll next month at