25 February 2011

EFAMA reply to the European Commission Public Consultation on the Review of the Markets in Financial Instruments Directive

On developments in market structures, a large majority of EFAMA members agree with the introduction of a definition providing general requirements common to a broad range of trading facilities. However, the Commission’s approach to defining organised trading facilities (OTFs) is different from the approach taken to date by CESR, and results in a very wide definition covering interest or orders, which only seems to exclude bilateral OTC trades that are not made on any organised facility or system, and which could even capture systems at asset managers, subject to how the EMS/OMS exemptions are drafted.

Regarding broker crossing networks (BCNs), CESR and now the Commission propose requirements for pre‐trade transparency and post‐trade reporting that are proportionate and recognise the hybrid nature of the activity by individual firms operating these crossing networks. However, extending this work to the more generic OTF without identifying any principles for sub regimes other than BCNs would create legal uncertainty. In the opinion of EFAMA members, it is therefore vital that the Commission clarifies the definition and identifies the principles by which it will create sub regimes, the types of rules that might get applied to the sub regimes, and the principles by which proportionality will be judged (having regards perhaps to the hybrid nature of any OTF). The Commission should also carefully consider possible barriers to entry being thereby created and impact on competition.

On pre- and post-trade transparency, EFAMA agrees with the Commission’s proposals to improve the pre‐trade transparency waiver regime and believes that a more precise description of the waivers would provide greater clarity for market participants and competent authorities. They support the requirement that ESMA monitor the application of the waivers on an ongoing basis, with regard to market developments.

Some EFAMA members disagree with the Commission’s statement that the increased use of dark pools may ultimately affect the quality of price discovery mechanism of the lit markets. They consider that dark pools serve an important and often distinct role from lit markets in the efficient functioning of markets, and therefore in respect of achieving optimal investment performance for long‐term savers and pensioners.

If the Commission intends to introduce a rule to make stubs pre‐trade transparent, EFAMA considers there is a need for clear evidence of real adverse impact to be presented. EFAMA suspects the costs of any solution would far outweigh any related benefit in price.

With regard to ETFs, a very large majority of EFAMA members agree with the Commission's proposals to extend the MiFID transparency regime. However, it must be ensured that such extension only applies to true ETFs (which are UCITS), not to all other UCITS that – depending on national trading models – may be admitted to trading on RMs. It is therefore important that the definition of ETF be correct. They are concerned by the fact that the Commission does not provide a definition, and the definition used by CESR in its consultation would catch many more funds. EFAMA strongly encourages the Commission not to modify or expand the current reporting requirements for UCITS, except for true ETFs.

On data consolidation, improvements in data quality and in data consolidation are by far the most important issues that need to be addressed in the MiFID Review in reference to Equity Markets. They greatly impact the ability of investment managers to provide best execution to their clients and to obtain proof of best execution. They also create difficulties for the valuation of assets, portfolios and funds.

EFAMA strongly supports the Commission's proposal regarding reporting through APAs. MiFID should provide that all publishing must occur through an APA. EFAMA agrees with the criteria identified for an APA to be approved, and that it has highlighted the need for regulation to be amended in order to ensure consistency of both the content and format of trade reports.

However, the introduction of the APA should not be seen as an excuse for investment firms to fail to comply with their obligations, nor should it allow competent authorities to consider that their job will be done by an APA. It is clear that some of the reporting of trades through OTC reporting mechanisms offered by regulated markets suffer from very simple errors such as fat finger mistakes by the reporting firms. The existence of APAs will not reduce the extent to which competent authorities will need to engage more with investment firms to ensure that the quality of data in Europe approaches the minimum needed to provide a consolidated tape.

On transaction reporting, EFAMA reiterates its long‐standing request for the publication by ESMA of a list of financial instruments as clearly required by Article 11 of the MiFID Implementing Regulation, either through national regulators or via the CESR Database. The fact that firms across Europe do not have one has been costly in respect of their ability to identify reportable transactions and has led to firms over-reporting, again at an additional cost to firms and inconvenience for regulators.

On reinforcement of supervisory powers in key areas, EFAMA members are very concerned by the possibility to grant powers either to the Commission or to national regulators to ban the distribution of a product or the provision of a service retrospectively, either on a temporary or permanent basis. Both investors and financial firms need a high degree of certainty and predictability regarding the trading environment in which they operate.

The criteria for such a ban proposed by the Commission are very broad, and would have to be very clearly and strictly defined in order to avoid potential arbitrariness or – in the worst case – political interference. They strongly suggest that a full public consultation should be held on a list of criteria under which intervention in the market could be considered.

Comment letter 

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