Inside MiFID 2 review: Consolidated tape, CCPs open access and a level playing field
The MiFID/ MiFIR review will zoom in on the share trading obligation and the trading distribution between regular exchange venues, multilateral trading venues and investment banks, who trade shares against their books. According to data by the European Securities and Markets Authority (ESMA), investment banks account for a third of all transactions. Tilman Lueder, head of the Securities Markets Unit, DG FISMA, European Commission, said that they did not account for investment banks to have such a large share. “We need to examine if this is a result of MiFID. Investment banks are stop gaps for big asset managers and larger volumes, but they are executing smaller tickets too. We need to see if it is an efficient way to organise,” said Lueder. Udo Franke, head of the Stock Markets and Securities Division, German Federal Ministry of Finance, argued that the review should address issues in the market structure aspect, as there is a lack of a level playing field.
The consolidated tape, which has common data from trading venues across Europe for all trade, would give clarity, added Lueder. “My private hunch is that the share of investment bank in trading activity is due to data inefficiency, as not all these trades are price forming but are technical trades that are not in the open market. The consolidated tape would give us clarity on where trades are mostly executed and on what market it is and separate the price forming trades from non-price forming trades (or technical trades). It is also a response to create more trading volume in the secondary markets. Harmonisation of data reports and data quality is an ingredient for data consolidation for a single overview of the market,” pointed out Lueder, at an online event by Bloomberg.
Open access for central counterparties (CCPs) is yet another focus area, especially with the context of Brexit. In the derivatives trading on the exchanges, it is far more complex to see distribution of trade flows, said Lueder. “Futures on Bunds and sovereign debts are traded more on the EU exchange and these contracts are processed in a clearing facility offered by vertically integrated groups. This structure has been under attack for a while now and trading venues want to move to over the counter (OTC) mode where they trade on a particular exchange and congregate on a single trading house versus exchange traded in an integrated clearing house. This issue has come to the fore after Brexit. EU exchanges are strong in integrated futures and they would like to see it preserved for the creation of benchmark indices that require this vertical structure. Open access will be integral for OTC derivatives. There are many more trading platforms offering identical products to the OTC derivatives, which are cleared in a big platform that is in the UK. We see this as a structure issue for the EU further down the road,” he said. The review will monitor OTC derivatives flow post-Brexit and look at the vertical integration in exchange traded derivatives, to decide if they will retain the model or allow an open access.