Staring Down the Barrel of Mifid III

During FIX Protocol Limited's EMEA Trading Conference in London last week, an over-the-counter (OTC) reform panel was asked about equivalencies between the Swap Execution Facility (SEF) in the US, and the Organized Trading Facility (OTF) in the EU. The answer was decidedly hedged.

It's not hard to see why, as quite frankly, there's no information or surety about the eventual European regulatory landscape. Panelists mentioned that the US has actually stormed ahead quite quickly with regards its own reform, leaving Europe in the dust as the Markets in Financial Instruments Directive (Mifid II) languishes in discussions between the European Commission, Parliament and regulators.

Indeed, all complaints about the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) being tardy with their finalized rules aside, compared to the political structures of Europe they're highly organized and efficient in their own right. The Central Securities Depository Regulation (CSD Reg) in the EU has helped to flesh out some of the technical aspects of elements of reform, but we're still no closer to really discovering the finalized idea of what sets an OTF apart from a multilateral trading facility (MTF), say, or some of the other key particulars.

Running Low
Moreover, time is running out for the debate on Mifid II. It's at the point now where constituent nations such as Germany are forging ahead with their own versions of rules governing high-frequency trading, and prominent MEPs are warning in the pink pages that Mifid faces a third round of revisions─Mifid III─if the EU can't sort its act out.

It's exactly the kind of situation that we should be avoiding. Regulation must not fragment in Europe, particularly over key issues such as the oversight of algorithmic trading, with rules in one financial center different from those in another─Frankfurt and London, for instance. The US model isn't perfect, but in the interests of alignment, there has to be some kind of cohesive bond that includes New York in whatever Group of 20 mandates say, not to mention the broader extraterritorial concerns of documents such as Dodd-Frank and Mifid. The German move, far from being an attempt to jump-start the process, seems more like a way to impose their own framework in practice with a view to eventual adoption in EU law.

Regulation must not fragment in Europe, particularly over key issues such as the oversight of algorithmic trading, with rules in one financial center different from those in another.

The uncertainty doesn't just have political cost, of course, but real cost, measured in dollars, cents, jobs and businesses. Interdealer broker ICAP expressed thinly-veiled frustration at the FPL conference that, as a platform provider, it's being forced to accommodate a range of scenarios in its software that may not even come to fruition when the rules are finalized. It's a point that I've heard time and time again, particularly in the IDB sector but also among vendors and participants themselves. In the US, frustrations from potential SEF registrants that even something as basic as the cost of becoming a SEF hasn't been released are readily apparent.

Europe doesn't need Mifid III just yet, and although Mifid II isn't perfect, another wholesale review that further delays reform for years and years isn't going to help anyone.

If you're interested in ongoing regulatory reform after the financial crisis, I'll be hosting a webcast on this very topic, on March 27 through the WatersTechnology.com website. It's free to listen, and promises to be a great discussion, hope to see you there.