Welsh Conservatives in the European Parliament
Dr Kay Swinburne MEP

City and Financial - The Challenges of MiFID II 26.05.11

As financial service providers, you will all be aware that the financial markets of today are proving to be fast moving and this dynamic environment means that both the markets themselves, and the participants interacting with them, are constantly evolving to encompass new technologies and exploit new opportunities. Against this technological change, and the fallout from the financial crisis, and also the requirement to review the MiFID legislation 3 years post-implementation – I believe that the review of MiFID comes at an opportune moment and should ensure that the European regulatory environment for the markets remain fit for purpose.
When Commissioner Michel Barnier unveiled his consultation paper on MiFID II in December 2010, he described it as half of Dodd-Frank. I think he meant this in two ways - both in importance to how financial markets will operate and be regulated in future as well as the sheer scope of topics that it will now cover.
          While MiFID I covered only equities, MiFID II will cover a lot more. Transparency requirements will be brought into the fixed income markets, new criteria will be developed for the trading of derivatives products, commodity derivatives will come under closer scrutiny, a new regime to encourage the development of trading platforms specifically for SMEs will be explored, rules governing packaged retail investment products will be written, corporate governance structures will be examined and precisely what powers the new European supervisory Authorities should have will be outlined.
To a large degree, I believe that MiFID has been a great success. There are now 141 registered multilateral trading facilities across the EU. Pan-European trading on MTFs has become a reality. And transaction costs have been significantly reduced. Given the impact of competition on national exchanges and the fact that the majority of these MTFs and therefore secondary trading volumes have moved to London, it is clearer why my colleagues from other EU countries believe that the UK was the major beneficiary of MiFID 1.
However, when talking about the intentions of legislators with regard to MiFID II we cannot ignore what else has been going on in the financial markets in the last four years. While those who work in equities tell me they had nothing to do with the financial crisis, the fallout of the crisis is never far from the minds of politicians, civil servants and decision makers. Systemic risk, financial stability and transparency are the three things that are now foremost in legislators’ minds when they think about financial regulation in all areas. Previous exemptions and reasoning behind some of the components for MiFID will and should now be questioned in the light of these new objectives.
Discussions over the suitability of the original MiFID definitions for today's markets have occupied many hours of Brussels policy-makers time.
This is for a number of reasons but especially the G20 conclusions with respect to derivative products and the requirement to centrally clear and report all OTC transactions and to move trading from traditional OTC markets to organised trading venues. The US is creating a Swap Execution Facility that has naturally led to questions over whether we also need to create an equivalent European Swap Exchange Facility. Bearing in mind that in the EU we already have trading platforms set up as MTFs for the purpose of trading many different asset classes including derivatives, I and it seems the European Commission agree that this is, in fact, not necessary. With a few adjustments to allow for less liquidity and voice trading, the MTF category could, in my opinion, be used as a template for this new type of trading.
In order to capture this, the Commission has proposed in its consultation paper a new trading platform acronym - an OTF -or Organised Trading Facility. The idea behind this is to capture the many different types of trading venue out there and open them up to the regulatory scrutiny, without losing the necessary flexibility in the market.
The actual wording of the G20 commitment is to encourage trading onto electronic markets where appropriate. It is generally acknowledged that trading on an exchange or alternative-trading venue provides the most transparency to the market, the burdens and limitations of liquidity and the specifications of each asset class also have to be accepted and acted upon. For this reason I think the OTF category will allow the market enough flexibility to come up with new, more transparent ways of trading that will satisfy the needs of regulators and the wider public, in the area of transparency
Controversially, there is more to the OTF definition than derivatives trading platforms. It also includes elaboration of a new subcategory for the broker crossing systems set up by the investment banks to match client orders - sometimes referred to as client dark pools. This proposal has sparked a fierce battle between exchanges and brokers, with the exchanges arguing that BCNs are, in fact, trading platforms exploring a regulatory loophole to avoid the burden of complying with the responsibility of becoming an MTF, and the brokers arguing that they are merely using technology to facilitate their traditional role in bringing together client orders over the counter, in order to provide them with best execution.
This argument was a focal point in my report last year, and is still ongoing.
As part of my research between April and July last year, I met the broadest possible spectrum of market operators and participants in order to try to reach a balanced view on the subject and see whether regulatory action was necessary. Over the course of that time, the most striking thing I found was the way in which each visitor to my office would tell me about the misbehaviour of other market players - the accusations flew from all sides and in all directions. Participants in the same markets were leaving a contradictory message that is not helpful to policy-makers. However, this competing lobbying brought me to the same conclusion as the G20, that transparency in the markets and market structures is the key.
If Broker Crossing Networks really are providing a necessary function to investors, one that they genuinely require, and the BCNs aren't operating a business model comparable to an MTF then they should be allowed to function but should in return have no problem opening up their business model to regulators. They would need to explain how their BCN matches orders on a discretionary basis and comply with a list of parameters that set them apart from multilateral trading venues. BCNs would register with the competent authorities, they wouldn't allow third parties direct access to their orders and provide assurance that market makers and the firm's proprietary traders would not be allowed access.
I believe that if these basic criteria of access and scrutiny were met and approved by the competent authorities, then a lot of the concerns in the marketplace would be allayed. Brokers have always offered clients the opportunity to trade in this way- it does seem that it is just the technology that has changed.
Further to this, I went out to seek the views of the buy side, asking why it was that they wanted to use BCNs - would they care if Brussels prevented their use. And the response I got to the simple question of why to choose dark over lit venues takes me to the next high profile topic of MiFID II - high frequency trading.
Smaller buy side firms complained that they were being "picked off" in the lit space by algorithms and HFT strategies which found their large or ice berg orders and moved the markets against them - the BCNs of the investment banks and other client dark pools provided them with a protected space that allowed them to execute their trades without the fear that they were being gamed by new players and new technology that they couldn't keep up with.
By its very nature, HFT is shrouded in mystery. In order to gain a competitive edge, HFT firms invest in huge amounts in proprietary technology in order to gain a speed advantage - unsurprisingly, when they have spent that much money developing their competitive advantage, they don't share precisely how they have achieved it with the rest of the market.
However, it is a lack of direct supervision and this opacity that has led to suspicion in the market place over precisely what the HFT firms are doing to generate the significant year on year returns that they have reported over the past few years. Their profits must be coming from somewhere, someone else must be making losses, and my initial concern was that it was the investors - the pension funds and those who couldn't keep up with the technology spending who were losing out.
That being said, I am not a Luddite, looking to turn the clock back. The more extreme proposals from the European Commission concerning enforced latency or minimum resting periods seem to have been more to frame the debate than to be practical policy proposals. I believe that HFT and electronic trading have added efficiencies to the market and a higher number of market participants have added to liquidity. Algorithmic trading has allowed the development of new and sophisticated strategies that can better respond to market developments.
However, since May 6th last year when the flash crash occurred in the US, global regulators can no longer view HFT and algorithmic trading in a completely neutral way. With new technology comes new risks, requiring new rules to compensate.
From an EU perspective, MiFID and the Market Abuse Directive will look in different ways at this. MiFID focuses on the actual structure of the market and what structural safeguards need to be in place to allow HFT to operate while maintaining a safe, level playing field, while MAD will clarify the rules on what trading practices will be considered abusive or should be treated as market manipulation.
MiFID II will look at what rules should govern practices like sponsored access and co-location. Both of these have traditional precursors on the old trading floors. It used to be your traders physical position on the trading floor that mattered. Now technology means that it is about the distance of your server, blade or chip to the exchanges server and how quickly you can receive and send your orders.
For me, the over riding concern in this area is equality of access. As the exchanges build their huge data centres in New Jersey and Basildon and elsewhere, they must ensure that co location is granted and sold on a transparent and non-discriminatory basis, so all market participants who want to use it, can.
The second problem in this area is not so easily solved, that of sponsored access - or more precisely unfiltered or "naked" sponsored access. While it is common for exchange members to allow outside firms or their clients to access exchanges using their membership, the pressure for increased speeds has caused many to worry that investment firms are cutting back on safe guards for these outside firms.
Given the ever faster access requirements, it would seem sensible for regulators to lay out guidelines on what safeguards should accompany sponsored access in order to maintain stability in the markets.
A further recommendation that I made in my report for the Parliament that the Commission took up in its consultation paper, directly concerns the algorithms being used primarily in the equity and derivative markets.
I believe that firms should have to explain the function and purpose of their algos to supervisors, so if they do constitute potentially abusive practices, or if they later start to go rogue and operate in an unexpected way, those supervising the relevant markets will be able to react quickly to prevent wider market disruption. Already, some of the regulators scrutinise and ask questions about firm's algorithms looking for their motivation; I must stress this does not require a full understanding of the complex maths involved. MiFID II will simply seek to embed this scrutiny as a more formal requirement and standardise the practice across all EU member states. Hopefully ESMA, the new Securities and Markets Authority and its peer review mechanism will also have a coordinating role to play here.
I would like to address a further topic which relates to the quality and availability of data.
When MiFID was first written, it was assumed by legislators that if they put in place mandated reporting requirements then the market would come up with a solution over how to consolidate it - it was in all market participants interests to do so - or so it as thought. This is not what happened, and it is a huge source of frustration for legislators that a market solution has not been forthcoming 3 years on so it will now force a regulatory solution.
The first step in this process will be the setting of common reporting standards and formats by ESMA, followed up by the creation of an Approved Publication Arrangement whereby you will no longer be allowed to report trades anywhere, but only to specifically authorised entities - this is likely to be the exchanges and MTFs, current data vendors, as well as possible free standing entities. This in it self will be a huge step forward, towards gaining a better picture of the market place. However, given industry's failure in this area, a further regulatory step is likely to be taken to create a European Consolidated Tape. The commission has put forwards three different options for this - the first mandating a non-profit entity along the lines of the US model, the second opening a public tender for a private company to be appointed for a set period of time, and the third, simply setting out what conditions would be required for an entity to provide a consolidated tape then allow private companies to naturally compete to provide different options.
Personally, I have to admit to favouring option B - although the Commission still seems to be making its mind up over which way to go. The demands of market participants could be met by option C, but as regulators need to play a more active role following the financial crisis and to have a better over view of the markets following the flash crash, I think one nominated provider has to be chosen. This would allow for the more refined supervisory methods to be potentially introduced here.
In the latest report by the SEC and the CFTC on the flash crash, they are looking at many of the safeguards I have already outlined as coming under MiFID II, but they are also looking at options like the trade at rule and a limit up limit down break on trading, to replace the blunt circuit breakers that were put in place directly after the flash crash. Instead of the whole exchange having to stop as it does in Europe when a period of market disruption takes place, this would be a more fine tuned approach that would limit the problems associated with circuit breaker stop and starts.
However, to do it, requires a consolidated tape, which we lack. The US is already going one step further at investigating whether to create a consolidated audit trail - something our own market is a long way away from.
For the time being, synchronising circuit breakers across all platforms in the EU should provide an extra level of safety - but as we look at market structure regulation we should keep in mind that it may be necessary to introduce these more complex tools in the future. Circuit breakers should presumably work across all equities, ETF and derivative platforms to be effective.
No one should be surprised at the inclusion of the fixed income space in MiFID II. MiFID was never supposed to only apply to the equities space. However, due to complexities of the bond markets it wasn't possible to reach hard conclusions and agreements the first time around. The Commission and CESR have not lain idle and have not forgotten that this was the original intent. This time around at the very least post-trade transparency measures will be introduced - and the Commission is certainly looking at pre trade transparency requirements as well. For this reason it is hugely important that industry comes up with solutions for the specificities of the products they use. If you don't, the Commission will. You have the expertise and know what level of transparency is already available and what level could be harmful to the market - it's vitally important that you make your case to the Commission and get your perspective known. 
Unlike fixed income, in the area of investor protection, the UK is actually ahead of the game. The Retail Distribution Review conducted by the FSA has already gone far beyond the formal requirements of MiFID and, the Commission has said that they are particularly interested in seeing what aspects can be incorporated into the review and ensure the same level of investor protection across the EU. Aspects of this will be dealt with in a separate piece of legislation "PRIPs - Packaged Retail Investment Products, but the trading rules will be dealt with in MiFID II. I think we need to see this as an opportunity. I get many complaints from financial advisers that they are subject to a higher level of regulation by the FSA than their counterparts from other parts of the EU, and just as many from constituents who are UK retail investors complaining that they have had problems with financial advisers who are regulated by other EU supervisors. The retail component of the MiFID review is the perfect place to change those parts of UK regulation that has not worked out as well as we may have hoped and to create a true level playing field between service providers across the EU. I am hopeful that while the Commission learns from the UK approach, the UK will also be able to admit where it may have gone too far with the RDR and accept some changes to their rules by the EU. Positive engagement in the process is key to a good outcome for all involved.
For me, the most important thing to keep in mind as we work on reviewing MiFID is what the markets are there for in the first place. They are there to provide a way for investors to channel capital to businesses and the real economy.
Other users should be facilitated and not hindered in so far as they help to achieve this goal - but when financial markets operate solely for the financial intermediaries and forget their primary purpose; this is where future dangers and future crises will occur.
I will, over the coming months, work with my colleagues in the European Parliament to shape the future MiFID legislation, which we expect to be released by the Commission in September. We will focus on key issues of transparency, especially the quality of trading data, equitable access for all players, proportionate oversight of participants and structures which ensure resilient markets, and above all adequate investor protection where all players have the same set of rules and play on a level playing field.
The MiFID legislation will be a co-decision process. The Commission will produce its proposals after the summer, following its consultation earlier this year which will generate a Committee report. The European Parliament has appointed a Rapporteur to steer the ECON Committee’s work and through 5 Shadow Rapporteurs, including myself, will work to produce a Parliament report. Once both institutions have finalised their reports, we will enter ‘trialogue’ – a protracted negotiation – to have a final piece of legislation, hopefully within a year of the Commission’s report being released.
There are many opportunities for market participants to interact and shape the legislation along the way and I would urge you all to use this time productively, finding solutions to the many issues that will be posed. I look forward to your involvement. Thank you.
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Welsh Conservatives

The European Commission has today designated European Protected Geographical Indication (PGI) status to the well-known Pembrokeshire Early Potato from West Wales.
The Pembrokeshire Early Potato was one of only three quality farm products whose applications for PGI status were approved today.
The EU PGI schemes protect product names against misuse and under these schemes more than 1200 products are already protected.
Commenting on this announcement from the European Commission today Dr Kay Swinburne MEP – who is from West Wales - said:
"I am delighted to see that this application to have "Pembrokeshire Earlies" added to the register of PGI products has been approved by the European Commission today."

"Achieving this prestigious status is a clear acknowledgment of the high-quality and distinctive produce we continue to deliver in Wales. Pembrokeshire Early Potatoes thoroughly deserve their place alongside the well-known food and drink products from right across the EU which already feature on the PGI register."


Kay was delighted to host an event to celebrate Higher Education, Science and Innovation in Wales last night in the European Parliament.  The event builds on the British Council’s “Strategic Analysis of the Welsh Higher Education Sector, Distinctive Assets”.  A number of experts spoke to share their views of Welsh HE at the event and how it can develop in the future.

In advance of the 'Fox-Hafner Report' vote on the single seat for the European Parliament, Kay and the other UK Conservative MEPs feel it is right to draw attention to the fact that the seven-year cost of the dual-seat arrangement comes to £928,000,000. Since her election to the European Parliament in 2009, Kay has strongly supported bringing the monthly Parliamentary meetings in Strasbourg to an end and therefore saving taxpayers a considerable sum of money.


Kay was delighted to meet Malala Yousafzai, who was awarded the EU's Sakharov Human Rights Prize at the European Parliament today.

Following Malala’s speech to the European Parliament, Kay said, “What an inspirational speech Malala gave to the Members of the European Parliament today. As a mother of young children myself, I hope that they can also aspire to achieve like her. Malala is an exceptional young lady who has overcome adversity by tremendous force of character and a passionate belief in the right of everybody to enjoy and benefit from education.”   


Kay was very pleased to meet with members of the Advanced Manufacturing Research Group at the European Parliament in Brussels, one of four groups set up in key Welsh research strengths to engage with EU research funds. The delegation visiting Brussels included representatives from Cardiff University, Bangor University, Swansea University and Trinity St.Davids University.

In advance of tomorrow's European Council meeting of leaders, Dr Swinburne has echoed the recommendations made in a recent report published by a number of business leaders, which highlights the importance of removing barriers to business competitiveness in Europe and getting rid of burdensome legislation by cutting EU red tape.

Last year Dr Swinburne encouraged businesses in Wales to highlight to the European Commission which over-burdensome regulations they would like to see slashed, by writing to small businesses all over Wales and asking them to tell her their red-tape problems.

Electronic cigarettes no longer face being taken off the shelves by the EU after Conservative MEPs were successful today in amending EU legislation on tobacco labelling.

Conservative MEP's led the amendment to defeat proposals that would have classified e-cigarettes as medicinal products, meaning they would have to undergo an overly burdensome and costly authorisation procedure, which would go beyond the procedures for traditional tobacco products... (Read more under 'Articles')



Welsh Conservative MEP Kay Swinburne has been sitting down with leaders in Europe's biotech field to choose the top five candidates to compete in this year's EuropaBio Most Innovative EU Biotech SME Award.

As a member of this year's judging committee, Kay is once again supporting the EuropaBio award, which has attracted applications from all three sectors of biotechnology - healthcare, industrial and agricultural, from across the EU... (Read more under 'Articles')


WELSH Conservative MEP Dr Kay Swinburne today hailed a vote in the European Parliament as a "wake-up call" in the battle to save Europe's endangered languages.

MEPs meeting in Strasbourg backed a report which calls on governments across the EU to develop action plans to encourage continued linguistic diversity.

The report, written by Corsican MEP François Alfonsi, also says governments should be "more attentive" to threats which may lead to languages becoming extinct.

Dr Swinburne, who was a shadow rapporteur for the report, has argued that Welsh can be seen as a positive example of language revitalisation which communities across the EU should follow... (Read more under 'Articles')

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