Brian Bollen talks to global bank Société Générale and post-trade vendor Torstone Technology about the latest updates on MiFIR, and why the journey toward its next review may still be a long one
The magnitude that the Markets in Financial Instruments Regulation (MiFIR) represents means that it has become something of an industry in itself, driven and fed by a panoply of European Union institutions, endlessly spawning dedicated committees and working groups.
MiFIR and the Markets in Financial Instruments Directive (MiFID) are the guidelines and rules that govern the European financial markets. They were created to strengthen investor protection, increase transparency and make these markets more efficient and resilient.
“There is currently a review in progress,” notes Jean-Pierre Gomez, head of regulatory and public affairs at Société Générale Securities Services in Luxembourg, when considering MiFIR.
“That is quite natural,” he continues. “Every time new regulation is introduced, not everything goes exactly according to plan, and the outbreak of COVID-19, the sudden surge in inflation globally, and the UK’s departure from the European Union, have all exacerbated matters.”
He sees no rush to complete the review, and predicts that it will not be completed in 2023.
Consolidated tape
Invited to cast an eye over the subject, David Pearson, product manager at Torstone Technology, identifies two clear industry debates. One, there is no real concrete movement on what to do about the consolidated tape (CTP), which is seen as necessary to enhance safety for investors and boost the orderliness of markets and transparency of pricing therein. Europe’s introduction of CTP, a high-speed, electronic system that reports the latest price and volume data on sales of exchange-listed stocks, is currently being deliberated by the European Council and Parliament.
In early April of this year, The European Fund and Asset Management Association (EFAMA), together with a number of its members, wrote an open letter to the European Commission to encourage the introduction of a standard CTP to the European market.
EFAMA, and the asset managers involved in the industry letter, highlight that the logistics necessitated by the COVID-19 pandemic “accentuated the need for a tape, both in providing critical data for liquidity risk management, and also as critical infrastructure to allow trading continuity in the event of an exchange outage”.
In addition, EFAMA and others said that the CTP data can also drive retail investor behaviour.
As the letter further outlined: “Post-COVID, we have noted greater retail investor participation and interest in equity markets. This nascent interest should be nurtured, and investor confidence and the ability to receive best execution enhanced through the existence of a CTP.”
Later in June, ESMA said in an update: “The CTP calculations will resume at the next regular publication date on 1 February 2023, based on an observation period from 1 July 2022 to 31 December 2022.” And so, we wait.
Mirroring this affirmation, Torstone’s Pearson says the industry seems to have gotten “stuck”.
He continues: “The equities departments and businesses say: ‘it is great, we love the idea of a CTP. Can you do fixed income first?’ And guess what, we talk to the fixed income side and they say: ‘we love the idea of a CTP; let us know when you have finished the equities bit’. No one is taking responsibility, and that is without even talking about who is going to build and pay for the necessary infrastructure.”
“There was talk of a CTP under MiFID a dozen years ago. Nothing is happening, and this is frustrating. If you are executing trades in a market, you want precision; you want price formation to be as clear as possible, you want to know what trading is taking place, so you can formulate the right kind of investment, make the right investment decisions on the buy-side and trading decisions as a broker.”
As markets and market participants look to the EU for guidance, action, clarity and a rigid timetable, it is almost impossible to ignore the suggestion that anything that is dependent upon the will of the rotating presidency will ever translate the necessary guidance.
The second ongoing debate identified by Torstone’s Pearson is deferrals of trade reporting in fixed income.
He comments: “If you execute business, you have to report, and that report is available for the market to see. There was a deferral system in London over 40 years ago, but if you do a very large or ‘jumbo’ trade, you can defer the report in order to help unwind the position and reduce your risk.”
“If I recall correctly, the London regime was five days long,” Pearson adds. “In the US, they are now proposing to make all trade reporting across the full remit of size one minute. Virtually instantaneous, regardless of the size of the fixed income trade. This of course will have implications for the size of individual trades, which will reduce, as no one will want to take on a jumbo position in one fell swoop.”
In the EU, meanwhile, end of day reporting, or end of week for jumbo trades, remains allowed, and there was one suggestion made at a session at the October Sibos gathering in Amsterdam that there could be a deferral of up to two
months for jumbo trades.
The future of MiFIR
Haggling, it seems, will continue for the foreseeable future. In the meantime, the reality of life in markets threatens to remain stubbornly out of alignment with the idyll sought by EU regulators.
The Central Securities Depositories Regulation (CSDR), notes David Pearson, was devised to tackle settlement failure rates that were deemed to be unacceptable. Under CSDR, failure rates have risen. Regulation may have, in effect, made matters worse.
Against this backdrop, Torstone’s Pearson commits to continuing the persual of its mission to help clients automate, “especially if T+1 settlement makes the progress envisioned in the US,” he concludes.
