On January 14 last, agreement was reached between the European Commissioner for internal markets and services and the European Parliament on the new rules that will constitute MIFID II. The complete text—Level 1—will be available in the next couple of weeks. The expectations are that it will become legislation during the second quarter of 2014. From that point, the negotiations will move to the European Securities and Markets Authority (ESMA), where the practical implementation of the rules will begin. This is estimated to finish in 2017. The new rules are Europe’s way of creating a more open, safer and responsible financial system and attempt to restore confidence to investors after the financial crisis.
The rules reach for greater transparency and will increase regulation in fixed income, FX, and commodity speculation. For example, trading will move to well-regulated trading platforms, which will be multi-lateral trading facilities (MTFs), systematic internalizes (SIs), or organized trading facilities (OTFs)—but only for derivatives trading. The commission’s view of dark trading is that “strict transparency rules will ensure that dark trading of shares and other equity instruments that undermine efficient and fair price formation will no longer be allowed.” Interestingly, national regulators will be able to withdraw the waivers if they feel they need to. In commodity derivatives trading, MIFID II will prevent market abuse by setting limits on any position held, reflecting the importance of this asset class to food and oil prices. National authorities will be able to restrict the size of the net position a trader can hold.
Market participants will be expected to file market participation “at least” daily. In derivatives, an OTF will be introduced to encourage competition in the European derivatives marketplace and to move derivatives trading onto a better-regulated marketplace.
With regard to high frequency trading, controls will be introduced that keep pace with advances in technology. Algorithmic traders will be properly regulated, and systems and risk controls will be put in place to reduce market abuse and to reduce the size and number of flash crashes.
Posted by Bloomberg on February 12, 2014