Some two-and-a-half years after the implementation of the Markets in Financial Instruments Directive’s second iteration (MiFID II), a plank in European Union’s (EU) capital markets regulation, which ushered in the era of unbundling for investment firms, some protagonists are contending that many of the rules “should be ditched” after the UK leaves the Union following its transition period.
This is the considered view of Roger Lawson, ex-chairman of UK ShareSoc that has around 5,000 mostly retail investor members, who argues that the problems that MiFID sought to address were issues that the UK did not have. Together with MIFID I, the regulation’s forerunner introduced back in 2007, the rules were designed to restore confidence in financial markets after the crash.
Together with MiFID I, the regulation’s forerunner introduced back in 2007, the rules were designed to restore confidence in financial markers after the crash.
Commenting on the benefits that have accrued to investors from MiFID such as touted increased transparency and best execution on stock and share trades, Lawson, an active stockmarket investor, commenting said: “I don’t know of any benefit that retail investors have gained from MiFID [I or II]. In fact you could argue it has actually got worse. Basically there is no money in providing research on small cap companies unless the company pays for it.”
Sandy Black, Chief Investment Officer at Polar Capital, has been among those who confirmed last year that less research was available on UK small and mid-cap (SME) companies since MiFID II’s introduction in January 2018.
Talk of Brexit certainly went off the radar since the onset of coronavirus pandemic, having raged for several years prior to that - if you recall. Further news about Brexit surfaced late this April with the next round of trade talks between the UK and EU scheduled for 11 May. With the transition period running out at the end of December 2020, any further extension would need agreement by 30 June.
Some might view the prospect of delivering Brexit along with handling the pandemic’s negative impact on Britain’s GDP as a pretty tall order - verging on madness itself. But equally one might ask does Lawson’s view hold much water is widely shared or not in The City and across Europe.
With talk swirling late last year over what was dubbed a “MiFID II refit”, as EU regulators realised the Directive might need amending, Dr Kay Swinburne, KPMG’s vice-chair of financial services and a former Welsh MEP who was one of the architects to MiFID II, defended the controversial rules in mid February as they faced a large-scale review.
She urged European authorities not to rip up the legislation and was reported as saying: “It was a mammoth task to implement this enormous piece of regulation and it needs time to bed down. There is a lack of data to make major changes at this time.”
At the time the European Commission was undertaking a scheduled review of legislation, which would take around 18 months. Separately, the European Securities & Markets Authority (ESMA), the Paris-based regulator, launched separate consultations on transparency of trading equities, a key element of MiFID II, with a second study into bonds. These findings were expected - prior to the pandemic’s onset - to be published this July.
Some of the changes could include focussing more the on granularity of trade reporting and time stamping, largely the preserve of big trading houses. The authorities have nevertheless acknowledged that the UK’s Brexit deal will play significant part in the regulations’ future.
Nicolas Bertrand, Head of Equity and Derivatives Markets at London Stock Exchange Group (LSE) who graduated in econometrics and holds a postgraduate degree in finance (DESS 203) from Université Paris IX Dauphin, speaking prior to the lockdown told me: “My personal view is that MiFID would need a complete re-write, but I doubt the new version will address the key points. Departing from MiFID means no equivalence, much much less EU-related business. But it can also be an opportunity to create a ‘market heaven’ outside of Europe.”
MiFID rarely causes ripples for most folk and can be an arcane subject, unless you happen to be a regulator or attending a conference on financial regulation. It could be considered akin to a minority sport, unless you happen to a compliance officer in The City or a Brussels bureaucrat.
That said, trader chatter via Bloomberg terminals early this February about that MiFID ‘rewrite’ by ESMA saw Sterling fall heavily against the US dollar and attributed to it. It might though have been confused with rules around MiFIR, as these can be arcane topics at the best of times. Neil Wilson, a Markets.com senior analyst, described it as the EU as “taking aim at The City.”
ESMA published updated opinions earlier this month (3 June) on post-trade transparency and position limits under MiFID II and MiFIR following its assessment of over 200 third-country trading venues against criteria published in opinions in 2017. The annex to the opinion on post-trade transparency includes a list of 136 venues from 25 countries, most of which have been assessed positively for all the instruments available on the particular venue.
Lawson, who recently published a finance book titled ‘Business Perspective Investing’, noted that one of “the problems” of MiFID centred on the compliance cost facing stockbrokers. “Fees charged to end customers by stockbrokers have been going up as a result [from MiFID] because they have to spend a significant amount of time in compliance in making sure they are compliant. And, costs have been pushed up everywhere,” he said.
He ventured that the UK could “get out of MiFID probably by just changing some regulations rather than a full Act of Parliament.” Also, the ex-ShareSoc chair lamented that the rules were “designed by people [regulators] who didn’t understand the stockmarket or the way investors operate.” In essence it was “regulation for the sake of it and misconceived.”
Graham Bishop, a consultant on EU integration issues, remarking on a panel at the latest annual MondoVisione (MV) Exchange forum in London said: “That corpus of rules [around MiFID] have been shaped by the UK and agreed by the UK. So, why would we [British] now turn around and say ‘They are all wrong…let’s ditch the whole lot.’”
“It may be that there will be people who want to make a specific case on that bit and that bit, etc. That’s fine,” he added. “You lose the ‘equivalence’ - fine. But complete ditching? I would be quite surprised if the House of Commons was prepared to put its reputation at risk from some of the practices of yesteryear.”
Hubertus Väth, a spokesman for Frankfurt’s financial centre, Managing Director of NewMark Finanzkommunikation and a former Deutsche Bank staffer, speaking at the same MV event that saw ‘Remainer’ Gina Miller interviewed by Professor Michael Mainelli, said: “MiFID was not only shaped by the UK, it was actually led by the country and is a reflection of the UK-based regulatory say. So ditching the rules would be a big surprise.”
Artur Fischer, a former joint CEO of Börse Berlin until this November, commenting from an exchange perspective said: “If the UK wants to continue to play a leading role in trading across Europe it would be beneficial for all parties involved if the UK would continue to follow the MIFID II regulation after Brexit. As a minimum the UK rules should only deviate to such an extent that ESMA can still acknowledge ‘equivalence’.”
An unintended consequence levelled at MiFID is that while MiFID II banned over the counter (OTC) trading in equities, it pushed it onto other venues or Systematic Internalisers [SI’s] in banks.
Petr Koblic, CEO of the Prague Stock Exchange and chairman of the Federation of European Securities Exchanges (FESE), who I met in the Czech capital after I had been in Bratislava, told me: “That’s great [SI’s] for the big banks in London, but not for exchanges like the PSE, where today we are unable to see around 50% of the trading activity since it is in the ‘dark’ - as opposed to on ‘lit’ books.”
That, he asserted should “greatly worry” traditional exchanges along with the continued trend in companies delisting from bourses. He added: “MiFID II has certainly accentuated the problems around MiFID I that it was supposed to remedy, but has utterly failed in that mission. I don’t know if we need MiFID III…but we definitely need something.”
Alasdair Haynes, founder and CEO of Aquis Exchange, an independent and regulated pan-European cash equities trading venue that operates MTF businesses in the UK and in EU27, opined: “The proposition to ditch MiFID rules [by Lawson] isn’t as mad an idea as one might first think. Take Best Execution, it’s no better today than it was two years ago.”
The former Chi-X Europe CEO and who was once in the running to head up the LSE, added: “The desire of MiFID was get centralization of trading on ‘lit’ books. However, what we see today is less trading on lit book and more trading on less transparent market places transparent [e.g. dark pools]. And, the drive to cap dark pools has failed totally. We also see a move towards ‘the close’ [of trading]. That was never the intention of MiFID.”
Even indirectly retail investors are “not benefiting” from MiFID, Haynes confirmed. “We know that the difference in toxicity between our platform [Aquis] and other exchanges can be in the region of £1bn a year. While this is not necessarily the retail investor per se, it’s the retail investors’ pension money and fund management money that is put aside for investment, which is missing out.”
This is all despite the fact that tools, analytics and information are available today to evaluate whether best execution has actually taken place.
For example, EU regulatory standards RTS 27 and 28, lay down obligations on all execution venues to publish data relating to the quality of execution of transactions (i.e. venue, average price, volume traded).
Furthermore, the regulators are starting to realise according to the Aquis boss that MiFID is “not working” as they had originally envisaged or intended it to. With much consultation having already gone prior to Covid-19’s impact - in what Haynes referred to as the “MiFID II refit”, he cautioned: “There’s a fear nobody wants to go to MiFID III.”
By Roger Aitken
