09 January 2012

MiFID II main issues and AMF priorities

MiFID came into force in November 2007, with three main aims:

• to foster competition among trading platforms,
• to lower transaction costs for investors, and
• to ensure that markets are suitably transparent.

However, the Directive quickly showed a number of limitations, resulting in:

• liquidity fragmentation due to the growing number of execution platforms,
• greater opacity in transactions, and
• no real cost reductions for final investors.

Main issues and AMF priorities

The proposals put forward by the European Commission at the end of October attempt to address these drawbacks, and they achieve genuine progress in areas such as:

• pre-trade transparency requirements for non-equity securities (particularly bonds and securitised products);
• stronger client protection, especially by allowing some UCITS to be classified as complex products, which is not currently the case since all UCITS are considered from the outset as non-complex;
• regulation of derivatives trading through enforcement of the G20 rules;
• regulation of commodity markets.

Furthermore, the proposals contain a clear call – the first time in a Commission text – for equivalence and mutual recognition of investment services providers and trading platforms with regard to third countries.

From the AMF’s viewpoint however, other issues ought to be clarified because they fail to address the most negative aspects of MiFID, and this could pose a real threat to market structure.

To improve transparency and price formation for the benefit of the real economy and its participants, incentives should be provided so that all sufficiently liquid and standardised financial instruments are traded on proper multilateral trading platforms, that is to say on venues where investors are appropriately protected in terms of order execution policy because non-discretionary rules are applied. In consequence, the share of transactions executed over the counter (OTC) and on darkpools would be reduced. This is essential for equities in particular. Accordingly, the AMF considers it extremely important that some of the proposals be improved:

• At present, there is no "incentive" for equities to be traded on truly transparent and multilateral platforms. The underlying risk is that the volume of trading taking place outside regulated markets or multilateral trading facilities (MTFs) remains or actually increases since the trading rules on these venues would be less stringent. One way of creating that "incentive", which the AMF is arguing for, would be to set a limit beyond which an Organised Trading Facility would have to become a fully-fledged MTF and likewise to shed more light on OTC trading in order to curb its development.
• The MiFID pre-trade transparency waivers, which were already too wide-ranging for equities, have been repeated identically in the draft directive, which will encourage the development of darkpools.
• Regarding post-trade transparency for equities, there is relatively general agreement on the consolidated tape, which needs to be comprehensive and centralised, as is the case in the United States. We cannot wait for the private sector to take the initiative.
• The Commission’s proposals on supervision could be more ambitious, since it is essential that Europe should move towards a centralised system for supervising orders and trading, first and foremost in equity markets.

Unless improvements are made, the MiFID II could result in a smaller proportion of trading taking place on regulated markets and MTFs, the only venues that contribute to price formation. This could prove highly damaging to the real economy. The AMF will be more active than ever in the coming months. The financial industry should not be the only beneficiary of the fall in transaction costs stemming from competition among trading venues; final investors, too, should benefit.

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