General remarks on market structure
FESE believes that the MiFID Review should provide greater clarity than is the case today on key questions of the market structure in all asset classes. Experience with implementation since 2007 shows a lack of consensus on key issues (even issues on which we believe the legal text is clear). The most important benefit of the MiFID Review will be to provide such clarity.
Above all FESE believes the Review should be based on the following principles with regard to market
structure:
• Market structure in any asset class has to be clear.
• It has to be based on a functional approach (as is the basis of the FSAP and specifically MiFID).
• It has to be mandatory in the sense that once a certain activity falls into a certain category, the participant should not have the ‘freedom’ to get out of that category. This is not to be confused with giving all market participants sufficient flexibility and choice in the actual trading venues they may choose to do business with or to operate.
• The structure has to make a clear distinction between the activity (the function) and the rules attached to it. Lack of clarity in this point only creates confusion and uneven application.
• For simplicity and fairness, the structure has to have the minimum number of venue types necessary to capture all the basic trading functionalities, avoiding either of the two extremes of assuming that all functions are the same and assuming that small differences in business preferences constitute a legitimate new activity.

Based on these principles, FESE finds that the existing venue classification of MiFID is sufficient to capture all the major trading functionalities in equities, while in derivatives there might be a need to consider a new category to capture some activities not possible to include in RMs and MTFs.

Equity market structure
• There are some important anomalies in the ‘big picture’ of how much trading is flowing through each type of regulated venue. By all public records, a significant amount of trading is taking place in the OTC space, i.e. trades reported as OTC and subject to only OTC rules. The magnitude of this, even at the lowest end estimate of 13% (assuming for example that every OTC trade were to be quadruple counted), contrasts with the MiFID vision of OTC as a ‘spill‐over’ category and as an exception from the pre‐trade transparency obligations of the Systematic Internaliser category. The trading in the OTC space seems in particular to be quite important in relative terms when compared with the MTF and SI categories, which are the two main venue types created by MiFID to create competition with RMs and to capture the off‐exchange trading. This fact contrasts with the expectations of some market participants who thought that after MiFID most off‐exchange trading would happen in the form of MTF or SI trading. The great majority of dark trading (defined as trading that happens without pre‐trade transparency) is happening in the OTC space, not in the RM o MTF platforms set up under the MiFID waivers. Finally, the fact that a full accurate picture of the trading is not available is itself an important fact that needs to be included in the MiFID Review as atopic of discussion and reform.
• The Review should ensure that only those trades originally intended to be OTC are subjected to the OTC freedoms. In addition to aggregate market share of trades reported as OTC, the Impact Assessment needs to analyse what exactly is being traded on an OTC basis by looking at the trade by‐trade analysis, which is perfectly possible to do with the existing data and which has been done in a recent independent study by Frankfurt University and Celent. This study concluded that the post‐MiFID trading that has been reported as OTC is very different in nature from the OTC envisaged by MiFID Recital 53; that OTC is being used essentially for small size trades that would not face any market impact; that a big part of OTC trades are at sizes that one would normally have expected to see subjected to SI pre‐trade transparency rules if they had been bilateral, and subjected to full transparency (and other MTF rules), if they had been multilateral. This suggests that an important amount of trading appears to be escaping the MiFID rules on trading venues for MTF or SIs.
• The business models of many broker crossing networks could easily be seen today as either an MTF or an SI. The Impact Assessment needs to consider seriously the fact that MiFID may not have to be revised in any fundamental way to “capture” BCNs, because the fundamental characteristics of these platforms are already captured in the MTF or SI definitions. On the contrary, not treating them as such, when they do the same business as RMs, MTFs or SIs, would mean allowing unfair competition and undermine investor protection and market integrity.
• The MiFID Review must provide clarity on a number of fundamental principles of the MiFID structure, namely the fact that the MiFID framework is supposed to be exhaustive; MiFID categories of venues are mandatory and must be enforced consistently; no two competitors should be allowed to do the same business while being subject to different rules; the main division of the market structure is between multilateral and bilateral, and all rules follow from this; multilateral trading cannot be discretionary; multilateral trading cannot allow restrictions for private access; bilateral trading occurs when a broker assumes capital risk and is therefore subject to lighter rules than multilateral trading; and a platform that crosses two orders is multilateral. In line with these views, we make recommendations to improve the definitions of MTF and SI and introduce a new and explicit definition of OTC based on Recital 53.

Derivatives market structure
A well‐defined, comprehensive and exhaustive market structure is also crucial for derivatives markets. The ultimate goal should be that all market places/trading venues arranging or facilitating trades need to comply with MIFID market rules. Tighter enforcement of the three existing MIFID trade venues categories or small adaptation of how they are defined should allow covering all market places. However, if after thorough analysis of trading activities not captured by the current venue categories (which is not included in the CP), the Commission could demonstrate that some trading activities cannot be covered by the existing categories, then the introduction of a new category of execution venue like OTFs for certain derivatives market business models such as voice‐arranged markets could be envisaged.
It will also be necessary to understand how such a new category relates to existing execution venues and in which cases a conversion to an existing category would be necessary/justified. In principle, FESE would support thresholds for conversion to a derivatives MTF, and in such a case it would urge for thresholds that are clearly defined and enforced.

Equity market transparency
FSE supports the proposed maintenance of the transparency requirements on equity markets. FESE agrees with the Commission Services that the LIS waiver already has enough flexibility vis‐à‐vis changing market conditions and should therefore not be weakened. Similarly, FESE supports the proposal to introduce a minimum size for the reference price waiver.

Equity data consolidation
FESE supports the proposals to improve the quality, timeliness and availability of OTC post‐trade data and the consolidatibility of all data through standards that support existing industry initiatives such as the harmonisation of trade identifiers along lines proposed by CESR. FESE strongly disagree with any proposal that would take competition out of the equity data area, and therefore firmly oppose the Options A and B in relation to the consolidation of data. FESE’s vision is that of competing but equally good, reliable, reasonably priced consolidated tapes being offered by the industry subject to the same principles of competition as those underpinning the rest of MiFID. These tapes already exist and with the help of selective standards where needed these tapes will be the quickest and most efficient way of meeting investor needs. There should be caution against the Commission launching a mandatory utility tape – whether it is run by the regulators or a single industry provider – which would be a major waste of precious time and resources for both the regulators and the industry, come at a cost to the taxpayer and complicate the trading environment without solving any of the underlying problems with data.

SMEs
As FESE’s members operate RMs and MTFs that admit to trading many smaller companies, FESE is sensitive to the constraints faced by such companies when accessing capital markets. It also acknowledges that some aspects of the regulation of trading have an impact on SMEs’ access to capital, e.g. the question of how data is presented could very easily reduce the visibility of SMEs. However, when these issues are taken globally, FESE does not believe that there is any major initiative needed in the MiFID Review that would improve the SMEs’ access to finance. In particular, it is opposed to any move to lighten the regulatory requirements for SMEs to come to the markets. FESE feels that the choice of RM vs. MTF admission already provides sufficient choice for the different sizes of SMEs in Europe.

Non‐equity market transparency
FESE very much welcomes the proposal of requiring pre‐ and post‐trade transparency for all trades in bond market products. Based on its experience, FESE fully believes that properly calibrated pre‐ and post-trade transparency regimes should apply in the benefit of all market participants, in particular investors.
As for derivatives, FESE strongly welcomes pre and post‐trade transparency as a principle. The European Commission’s proposals are in line with the G20 objectives of providing further transparency to the OTC derivatives markets. Nonetheless, as with bond markets, it is inappropriate to envisage a mere extension of requirements from one market to another. FESE welcomes the suggestion to apply such a transparency regime by type of derivative product/market as we consider that some calibration may need to be performed because products/markets are very different from each other.

Intermediary rules
FESE supports the continuation of an execution‐only service since that will help retain competitive pressure on intermediaries’ services to clients and help with the cost and choice faced by investors when accessing capital markets. FESE is of the opinion that UCITS should be kept in the list of non‐complex instruments.

Commodity derivative measures
FESE generally welcomes the proposed regime of position reporting. It agrees that some forms of market abuse, such as manipulative squeezes, would be more easily identified where regulators have access to position, rather than transaction, reports for appropriate instruments.

Transaction reporting
FESE members agree with the extension of the transaction reporting regime to all financial instruments admitted to trading or traded on the above platforms, as this extension would ensure that adequate market abuse monitoring rules are applied consistently across financial instruments.
FESE would support the extension to those OTC derivatives whose value depends on the performance of a financial instrument that is admitted to trading on a RM or on the credit risk of a single issuer of such financial instruments.
For the regulation to be effective, regulators should avoid requiring transaction reporting where position reporting would provide the relevant information. As mentioned above, some forms of market abuse, like manipulative squeezes, would be more easily identified where regulators had access to position rather than transaction reports for appropriate instruments.

Reinforcing supervisory powers (commodity derivatives)
FESE believes that a well‐equipped market surveillance system, together with an adequate position management regime, rather than hard position limits are the most appropriate methods to maintain orderly commodity markets. FESE considers that position limits are not an effective tool for managing price volatility other than on settlement. In addition, position limits may have the unintended consequences of squeezing markets and could be counterproductive from a market dynamic point of view.
In the particular case of commodities, position limits on hedgers, arbitrageurs, investors and speculators holding positions for the longer term would be ineffective in tackling price volatility, even were it to be proved conclusively that excessive positions, whatever the definition of that might be, leads to ‘excessive commodity price volatility.’

FESE Response_MiFID Consultation_Feb 2011.pdf">Complete paper