MiFID II faces national challenges

Spanbroek: MiFID II is at risk of regulatory arbitrage

Proposals in Germany that would affect the country’s capital market structure could create problems of regulatory arbitrage when the European Commission’s MiFID II arrives in 2015-16, according to Mark Spanbroek, general secretary at the FIA European Principal Traders Association.

“It’s a shame that European countries are moving ahead with their own national legislation on market structure, when we have worked so hard on MiFID II,” Spanbroek told Banking Technology. “The German proposals are sensible, but this independent action undermines MiFID II. It’s going to be very hard for the regulator, ESMA, to control the market effectively when there are different rules across Europe.”

Earlier this week, Germany’s parliament met to discuss proposals that would impose minimum tick sizes, order-to-trade ratios, and an obligation for high-frequency trading firms to submit their algorithms and trading strategies to the regulator. FIA EPTA broadly supports the proposals, which have also received praise from senior buy-side traders. But Spanbroek is concerned that the German move, which comes on the heels of France’s introduction of a unilateral financial transaction tax in August, could set a precedent for more national legislation that would take Europe further away from the integration ideal at the heart of MiFID II.

“Market structure issues such as tick sizes need to be uniform across Europe, because otherwise a platform in one country could use them for competitive advantage, which would have negative effects on the market,” he said. “That’s the good thing about MiFID II – it sets a harmonised agenda.”

In 2009, MTFs BATS Europe, Turquoise and Chi-X Europe became embroiled in controversy over their reduction of tick sizes. The move by the MTFs to offer trading in smaller increments initiated a brief tick size war between rival trading venues in Europe, including NYSE Euronext, sparking fears of a ‘race to the bottom’ in which liquidity would be fragmented into infinitesimally small increments for the sake of competitive advantage. The issue was eventually settled by an agreement between Europe’s trading venues that was brokered by the Federation of European Securities Exchanges, but is not legally binding. Under MiFID II, the European Securities and Markets Authority will have the power to supervise Europe’s tick sizes and enforce standards.

However, industry participants and politicians have become increasingly impatient over the length of time it has taken to reach a pan-European agreement on MiFID II implementation. MiFID II is currently being negotiated between the European Parliament and the Council of Ministers, and is not expected to take effect until 2015 or 2016, according to the latest estimates from Kay Swinburne, MEP and member of the European Parliament’s ECON Committee.

Concerns about ongoing delays to the European rulemaking process have been picked up by Philippe Guillot, executive director of the markets directorate at French regulator AMF. Speaking during a panel discussion in London hosted by SunGard earlier this week, Guillot warned that more immediate, prescriptive regulatory intervention may be needed.

“This is too important to be left to the market,” he said. “Market structure is all too often used as a competitive advantage by someone desperate enough to destabilise the market. Do we have to wait two years for MiFID II, or should we do something as quickly as possible? We need the regulator to safeguard against that kind of distortion.”

The German proposals will now be debated with the Treasury, before returning to parliament where it may be passed into law. Sources close to the situation have suggested that legislators are keen to reach a conclusion by the summer. Implementation could then proceed in 2014.