UK proposes changes to MiFID II rules in post-Brexit vision for financial services
The United Kingdom seems to have set its sights beyond the equivalence with Europe. Chancellor Rishi Sunak, speaking at Mansion House, said that the UK is focusing on “pursuing an independent path outside the European Union”. Sunak pointed out that the ambition to reach an equivalence decision for financial services has not happened, leaving the UK to its own decisions. “We now have the freedom to do things differently and better, and we intend to use it fully,” added the Chancellor.
The first ‘divergence’ from EU rules is the proposed changes to MiFID II regulations, laid out in a consultation titled Wholesale Markets Review. “The government sees the UK’s departure from the EU as an important opportunity to ensure that we have regulation which is right for the UK,” began the review, adding that some parts of the MiFID II regulation are costly and stifled innovation for the City, in the aftermath of Brexit.
Scrapping double volume caps and share trading obligations
The UK is proposing to remove double volume caps (DVCs), which was introduced to limit the trading that happens without pre-trade transparency to 4% of all trading in an instrument at a single venue, and 8% across all venues. The government is seeking to scrap the DVC, stating that it is not an appropriate tool to protect price formation in the UK markets. In its place, the UK regulator, the Financial Conduct Authority (FCA) will continue to monitor the level of dark trading in markets and intervene when these volumes undermine the price formation process. The intervention will be based on a “variety of sources and market quality metrics, including views and analysis from market participants and other stakeholders”.
The Share Trading Obligation (STO), which requires investment firms to ensure that their shares are traded on a list of transparent venues, might also be dropped. The removal of this obligation will allow firms to trade shares on any trading venue in the UK or overseas, as long as best execution is upheld.
The scrapping of DVCs and STO has been welcomed by some, such as Adam Farkas, Chief Executive of AFME. “In relation to the DVC, it is worth noting that UK and EU markets are alone in having a volume-based constraint on undisplayed liquidity. European equity markets are global outliers in placing unnecessary caps on this type of trading activity, rather than enabling better execution performance for end investors. Meanwhile, the STO has had the unintended consequence of restricting firms’ access to the most liquid markets, making the delivery of best outcomes for investors more challenging. We have long argued that this is a feature which can render markets less attractive as a place in which to invest or raise capital,” said Farkas, urging the EU to do the same.
The definition of SIs will also be changing to a qualitative one, where it will be determined by its market activity for a particular asset class rather than MiFID II’s quantitative approach of calculating for each financial instrument on a quarterly period covering the previous six-month tenure. The FCA will publish further guidance, which will be “developed over time”.
The proposal also suggests changes to the MiFID II tick size regime, currently calculated on the liquidity of the most liquid market in the UK or EU. Stating that the UK investors are subject to uncompetitive prices, the government considers recalibrating the regime so that trading venues can follow the tick sizes applicable in the relevant primary market of a share where that share does not have its primary market in the UK.
Miles Celic, CEO of TheCityUK, pointed out that these changes are in line with UK’s ambitions to retain its top position as a financial services hub. “That means working in partnership with industry and regulators to develop a cross-governmental strategy to bolster the industry’s competitiveness. This includes simplifying our regulatory regime while maintaining its quality and strength, providing certainty and clarity with a business tax roadmap, and enhancing efforts to attract and retain the talent we need,” he added.
Amidst these regulatory divergences, Sunak hoped that the European Union will allow access to London’s clearing houses for derivatives trading. Stating that it is entirely within international norms for like-minded jurisdictions to use each other’s market infrastructure, Sunak added, “I see no reason of substance why the UK cannot or should not continue to provide clearing services for countries in the EU and around the world.” Sunak also hinted that the UK will seek to strengthen its relationship with the US, where it already exports $28bn of financial services annually, Switzerland, and China.