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The original Markets in Financial Instruments Directive (MiFID I), which came into effect in November 2007, aimed to increase the competitiveness of EU financial markets and to facilitate competition between traditional exchanges and alternative venues.
The European Commission has brought forward proposals, known as MiFID II, to reform and extend this regime. This is a complex and significant legislative package that seeks to regulate hitherto less regulated markets in line with G20 commitments.
Notably, the proposals in relation to third country access are ill-conceived. There is a risk that, if introduced, the provisions could lock third-country firms out of the EU markets, which would have an extremely damaging effect on European financial markets, including the City of London. Given that global financial markets are independent of geography, it will also be wholly impractical.
The House of Lords also fears that an unsophisticated advance to greater transparency could undermine the liquidity and innovation of these markets. Thus on pre-trade transparency, the House of Lords understands the thinking behind the Commission’s proposals, but it is important to acknowledge the markedly different characteristics of each sector of the market, in particular in terms of their liquidity. A one-size-fits-all approach to pre-trade transparency must be avoided. There could be serious repercussions for the entire EU financial services industry were the leading position of the UK within the global financial sector to be undermined because of this approach. It would also have a negative impact on innovation.
There is considerable uncertainty regarding the implications of the proposals for a new category of Organised Trading Facilities (OTFs), aimed at ensuring that all organised trading is conducted on regulated trading venues, and in the proposal to increase regulation of algorithmic and high-frequency trading. The proposals on investor protection and corporate governance are also flawed.
The report concludes that the MiFID II proposals have been rushed, and risk creating confusion rather than providing clarity in terms of the regulatory framework for investment. It is more important to get the proposals right than to get them passed quickly. Given the potential implications both for the UK financial markets and for the EU financial sector as a whole, the House of Lords urges the UK Government, in liaison with the Commission, the Council, and, in the context of its important co-decision powers, the European Parliament, to play their full part in the negotiations on these important proposals.