Where are we post-MiFID II implementation?
MiFID II sets out some ambitious goals in the realms of OTC trading. Namely, calling for more OTC trades to be executed on trading venues and subjecting trades to new price transparency rules.
Yet, a common observation by market participants is that MiFID has so far provided a very modest increase in trade price transparency. There are three primary drivers:
- Self-imposed limits set by regulators regarding trade disclosure. The Regulatory Technical Standard that covers fixed income and derivatives trading includes swingeing exemptions to pre-trade transparency (limited to liquid products, and excluding the largest trade sizes). The current list of fixed income products deemed liquid in the EU is 217 out of 69,000 (under 1%). In post-trade, many fixed income trades benefit from generous reporting deferrals. The current industry consensus is that price transparency in the EU is essentially unchanged from last year.
Access to and quality of data provided by APAs. Participants have reported various restrictions, including:
Data is not fully publicly available - for instance an instrument ID is required to access it
Data is only published for a short period of time
Data is not generally downloadable in a machine-readable format
Format differences between the various APAs
A Consolidated Tape provider has not yet been appointed to provide homogenous consolidated market data to participants
The mandatory Systematic Internaliser (SI) regime has been delayed until September 2018. An SI is an investment firm which, on an organised, frequent and systematic basis, deals on its own account by executing client orders outside trading venues. The purpose of the SI regime is to expand many of the rules that already regulate MiFID multi-lateral trading venues to bilateral trading firms.
The expected results are greater transparency and ensuring that the internalisation of order flow by investment firms does not undermine price formation on trading venues.
In practice, a number of important hurdles remain. ESMA will not be providing a registry of instruments that can be traded via an SI, meaning it is up to the industry to find a solution. The next few months will be crucial to the establishment of a repository that enables the industry to identify SIs and the instruments that can be traded with them.
ICE is in discussions with a number of key players and is looking to enhance its regulatory offerings with a tool that would link financial instruments and their associated SIs.