The latest draft of MiFID 2 which has been in circulation since Friday 2nd September has caused surprisingly few reactions from across the city. Maybe it is because of the timing (towards the end of school holidays) or it s great big hoax by someone who has lots of time on their hands. But I’m surprised by the lack of reactions.
Whilst it covers the extension of the original MiFID to new asset classes it also revises and updates parts of the original provisions and adds new requirements for derivatives. Interestingly, the commission uses this opportunity to admit that some of the original provisions in MiFID have been outpaced by technological development. And yes, the admission that fragmentation (in cash equities) caused by MiFID 1 is an issue.
Quite topically, the commission seeks to minimise the discretions available to Member States across Europe aiming for a single rulebook for EU financial markets, and a level playing field for Member States and market practitioners. So they have been listening.
In the draft, as expected the EC introduces OTFs as a fourth category to go alongside regulated markets, MTFs and systematic internalises. The OTFs will include broker crossing systems and systems enabling firms to trade (execute) clearing eligible derivatives. Platform operators must be neutral (this is not described further) and client orders cannot be executed against proprietary capital of the operator. But unlike regulated markets and MTFs, operators of OTFs will be able to decide who can get access to the venue.
Trading venues where commodity derivatives are traded come firmly under the spotlight by introducing more stringent rules such as granular position reporting and settlement conditions for physically delivered commodities. It also suggests that firms using commodity derivatives for hedging should be exempt but commodity trading firms will be brought within the MiFID Directive.
One final point I note, but this is by no means all of it, is that regulators will have increased powers to intervene at anytime in the life of a derivative contract and take action that a position be reduced. Apparently this is in the interests of the orderly functioning of markets, or market integrity.
Like many, I’m still digesting the 171 pages of the draft. And of course, it is still a draft with lots of crossings out, possibly something we weren’t meant to see just yet.
