The Good, The Bad, And The Onions: Part Two

The 5th annual TradeTech liquidity conference in London, held on November 29, was a top-shelf collection of participants in and experts on Europe’s equities markets. They discussed matters of liquidity, technology, and regulation in the present unsettled environment. This is the second of a two-part meditation on the conference.

The Slow-Moving EMIR
The European Market Infrastructure Regulation (EMIR) came up for discussion, especially in the second panel discussion of the morning, in which securities industry panelists had the chance to question Jasper Jorritsma, policy officer, securities market unit, DG Internal Market and Services, EC.

Among those directing sometimes-sharp questions at Jorritsma: Christophe Roupie, Global Head of Trading and Securities Financing, AXA Investment Managers; John Serocold, Senior Director, Market Practice and Regulatory Policy, International Capital Markets Association; Karl Spielmann, Head of Legal & Compliance, EuroCCP; and Mark Schaedel, Managing Partner, The Coba Project.

EMIR came into force [subject to various transitional issues] in August 2012, requiring that any Europe-based entity that is a party to a derivatives contract must report the particulars of the contract to an authorized trade repository (TR). EMIR also requires that financial counterparties to derivatives contracts must either clear their contracts through a central counterparty or adhere to certain operational risk-management requirements.

Spellman said that EMIR is a matter “very close to the clearing industry’s heart,” yet it is also a good example of how slowly things move, how matters can get held up in the European bureaucracy. He noted that in the U.S., Dodd-Frank regulations are only now coming into effect, two years after the bill became law. Europe “is in danger of making that look quick” by the deliberative nature of its own processes.

After all, the EC published a final proposal for EMIR in September 2010. Yet as noted above it wasn’t until August 2012 that most of EMIR came into force. It wasn’t until late September that the European Securities and Market Authority submitted final advice regarding certain technical issues. Some provisions of EMIR still are not effective, and MiFID II is amending some of that which is effective.

Bearing with MiFID in Process
MiFID, the 2010 re-working of the 2004 vintage Markets in Financial Instruments Directive, was a hotter topic, though, than was EMIR, and this reworking, MiFID II, was the main topic both of Jorritsma’s address and of the questions directed to him thereafter.

Jorritsma emphasized that when finalized MiFID II and its regulatory corollary, MiFIR, are works in progress yet. “You’ll have to bear with the European rule-making process for two months more,” he said, before a final text exists.

The development of MiFIR has historical significance, by the way, in that it shows that Europe as a whole is now implementing MiFID related regulations. National interpretation of the sort expected in the old Lamfalussy process has become superfluous. Whatever one’s fondness for the notion of national sovereignty, this change seems designed to make regulatory arbitrage more difficult.

One crucial aspect of MiFID/MiFIR is that it will require algorithmic traders to post competitive prices on a regular continuous basis, regardless of prevailing market conditions. The Eurocrats don’t want firms to just turn their computers off when things get hairy.

Also, the new system imposes rules for what it calls organized trading facilities. An OTF is defined broadly enough, Jorritsma said, “to capture all existing facilities that currently avoid regulation” and thus to change the nature of the OTC market. An OTF is any venue that is not a regulated market, that is operated by an investment firm, and in which buyers and sellers of financial instruments can interact in a way that results in a contract. Thus, OTFs include internal matching systems, also known as broker crossing systems, and the operators of such systems will not be able to execute client orders against the proprietary capital of the firm.

The Thought is to Oblige Them
There are a lot of other obligations, too, imposed upon OTFs, including a requirement (in all but exceptional circumstances) to suspend trading in a particular instrument if another OTF, multilateral trading facility or regulated market does likewise; requirements for pre-trade and post-trade transparency; and requirements to retain data concerning orders for a period of five years after their receipt.

Jorritsma knew that he was in the midst of a group, both on the panel and in the broader audience, that was largely skeptical of, when not more actively hostile to, much of what is involved in MiFID II. Indeed, he seemed to relish a sort of Daniel-in-the-lion’s-Den role.

One member of the audience, noting that the range of burdens to be placed on market makers seemed likely to discourage that activity, asked, “how are you going to incentivize them?”

Jorritsma replied: “The thought isn’t to incentivize them. The thought is to oblige them.”