Poll: what aspect of Mifid II concerns you the most?

Author: Gemma Varriale | Published: 24 Feb 2014
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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.

What aspect of Mifid II concerns you the most?
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.

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 concern.

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 market."

"We could see the liquidity of certain products significantly reduced as a result of these provisions," Green added.

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."

"The EC could say that nowhere is equivalent because nowhere does it exactly like us"

Because liquidity varies over time, Serocold noted the need for a sensible regime, both pre- and post-trade, that adjusts to such changes.

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 and implementation.

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 Green.

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 competition."

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 technology.

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 www.iflr.com and iflr.com/LinkedIn