An insider’s take on what Mifid 2 means to the UK
AT A TIME when growth in the UK economy is stalling, any proposal that aims to make it easier for businesses to raise capital should be welcomed. I hope that a single rulebook will improve the regulatory framework for investors but there are many elements of the Commission’s new Market in Financial Instruments Directive (Mifid 2) proposals that could do the opposite.
I share the concerns expressed that the rules on third countries may stop institutions from emerging markets advertising their services in the EU, which could disproportionately affect London. Having had experience of this issue in the context of the Alternative Investment Fund Manager Directive (AIFMD), I am very concerned that this will become a major problem as negotiations get under way on Mifid 2.
The European Securities and Market Authority’s (Esma) interpretation of the third country proposals at the actual implementation stage of AIFMD will only add to fears of European protectionism. The EU needs as much investment from emerging markets as possible, so building up walls to these valuable flows of finance would be incredibly unwise.
Also, the new proposals on fixed income and other asset classes could upend the structure of the bond markets. We must not cause a loss of liquidity at this of all times. There are legitimate concerns about the growth in importance of dark pools, which have developed in response to the fact that tough pre-trade transparency rules are waived for large trades. They serve a valuable purpose and if these waivers are removed or altered, we should ensure that this does not adversely affect market liquidity.
The proposals to regulate commodity derivatives look like sledgehammers searching for a nut to crack. There is no consensus on what has caused the wild swings in the commodities markets in recent years, and it is premature to introduce regulation that will not tackle root causes. Done badly, the regulation could make commodities markets much less efficient.
A further issue that has been included is high frequency trading (HFT). Investors are rightly worried that technology is fast outpacing regulation. Indeed some market players believe that the 6 May US flash crash of last year and the recent volatility in the markets were in part a consequence of HFT. This is an area that needs new regulation, but I am concerned that the Commission has been heavy-handed with these proposals. Data is still being gathered and we should wait for the hard facts so that we can legislate proportionately and without causing unintended consequences.
Esma is being given too much power to enforce the proposed new rules. As a consequence, the regulator could become the policeman of the rulebook rather than its interpreter. We must ensure that it is not given discretionary powers over individual firms.
It’s vital that both the Council and the European Parliament ensure negotiations remain rooted in evidence and that the implications for the real economy are borne in mind. These proposals put in danger much of the progress made under the original Mifid.
Syed Kamall is MEP for London and a member of the ECON committee.