Welsh Conservatives in the European Parliament
Dr Kay Swinburne MEP

Mondo Visione Speech, MiFID II and HFT - 14.11.12

Thank you for inviting me to speak. It is both a good and bad thing that I have been asked to speak to you today. Bad in that as a UK Conservative, and as a politician who supports the free market, I do not think that regulation and the views of a legislator should be of such high importance to you business as it seems to be judging by the number of requests I get to speak at industry conferences at the moment. Yet also good, as I am glad that the financial services industry is waking up and engaging in the EU legislative process. It is only be getting involved and making your views known that you will end up with workable and proportionate legislation.
When I started to work on this topic in an own initiative report for the Parliament nearly 3 years ago, I was surprised by how much the equity markets had changed. HFT, algos, dark pools, co-location, naked sponsored access - none of these were things I had dealt with previously. Yet MiFID I, in creating one large, pan-EU market for equity trading, made all of these strategies economical. Techniques that had previously only really made sense in the US markets, expanded their use into Europe.
Some of these techniques are clearly just the automation of practices that have existed in the markets for years. Many have drawn the analogy between where a specialist stood in the trading pit and co-location of servers. Some practices have opened up previously closed, broker driven markets, dominated by market makers, reducing spreads and causing more efficient price discovery. But, as with all new innovations, they have also brought new risks that regulators are right to address.
In MiFID II, the Parliament has introduced new requirements to mitigate the risks that have been indentified in relation to HFT strategies. Some of these requirements will fall upon trading venues to implement and some are upon the firms themselves, all of those who access the trading venues directly in the future will themselves be regulated entities under the proposal.
Directly applicable to exchanges will be a requirement that all venues implement coordinated circuit breakers, so if a flash crash type event occurs, it is immediately communicated to all other venues who can then decide whether they should also halt trading in a particular stock or more broadly across the entire market.
Secondly, there is a mandate for ESMA, the European Securities and Markets Authority, to develop rules on minimum tick sizes - so while allowing for calibration to differentiate between instruments we can prevent a race to the bottom by competing venues on tick sizes. Venues should concentrate on competing based on who provides the best service to their participants.
The third requirement introduced in the Parliament's text, for trading venues that will also effect market participants quite substantially, that I do not personally agree with, is a 500 millisecond minimum resting period. While certain political groups in the Parliament believe this will force the whole market to slow down and therefore benefit those users who are not at the cutting edge of technology, I believe, based on evidence from a number of studies, that it will actually do the opposite. Those market players able to enter the market fastest will know precisely how long an order has been in the market - and how stale it is - and so benefit from the information. While some investors currently worry about being picked off by HFT firms, this would signify an open season for all firms to operate strategies that do exactly that.
However, there is a reason why legislators feel the need to take such drastic action. They simply cannot see the economic benefit to split second trading, and have had that view confirmed by many long only investment funds. Arguments based on just how much spreads have tightened as a result of HFT and based on liquidity that is now provided by non-traditional market makers have been less than effective upon policy makers in Brussels.
As someone who believes in market based solutions, I do not understand why your customers are complaining to outside regulators and legislators instead of complaining to you. There are many simple things that venue operators could do if they wanted to limit the activities of HFT firms, or simply reduce the perception that they have been given an unfair advantage over other investors. This is why I have supported on of the central aspects of MiFID II that aims at moderating the impact of HFT strategies, namely to focus on the fee structures at the trading venues.
MiFID II requires exchanges to put in place fee structures that include market making obligations where appropriate, impose higher fees upon those participants with high order to cancellation ratios and those operating HFT strategies that place a higher burden upon the system capacity of the venue. None of these points are supposed to be overly prescriptive and clearly allow for each venue to tailor the requirements to what's right for them, hopefully providing a proportionate solution to the benefit of all market users.
The majority of the requirements in MiFID II that apply to investment firms themselves, relate to their interaction with regulators, Following the US flash crash, it took 4 months for the CFTC and the SEC to recreate 80% of the order book and to work out what happened - at the moment I don't think we in the EU would even manage to do that well. So a requirement for firms to keep the raw audit trail of their orders and have it made available upon request to regulators seems appropriate.
This fits in with something I alluded to earlier, there is a perception by both market participants and regulators, that faster, more technology driven markets are more prone to market manipulation and abuse. Whether this is true or not, it is certainly true that it makes market monitoring more difficult. Therefore, MiFID II and the new Market Abuse Regulation seeks to bring in new tools for cross-market surveillance. At the plenary vote 2 weeks ago, I authored an amendment, based upon the latest CPSS-IOSCO communication calling for all venues and market participants to synchronise their business clocks, so as to create one system of time stamps and therefore aid market monitoring - a key recommendation of the UK Science Departments Foresight report into the Future of Computer Trading and Technology in Financial Markets.
Having addressed the content of the Parliament's views on HFT and MiFID II let me explain a little bit about the process that it still has to go through before we reach final legislation and implementation.
The text, as voted by the Parliament two weeks ago, forms the basis of the Parliament's position in the process of co-decision. In parallel to the work of the MEPs, the council, made up of the 27 Member States also undergoes a long negotiation procedure, also amending and negotiating the Commission text until they can come to what is called a General Approach. They are a little behind the Parliament and aren't expected to reach consensus until December at the earliest.
When these two texts have been agreed, the three institutions; Parliament, represented by one Rapporteur or shadow Rapporteur from each of the political groups; the Council, represented by the rotating Presidency currently Cyprus, but switching to Ireland in January; and the European Commission, come together in a trialogue, to negotiate one final text that will ultimately become legislation. This can take a long time if the parties are far apart. In the case of MiFID, I think there will be a lot of agreement between us as the Commission has produced a good proposal to start with, however the sheer size and the number of issues that we will have to discuss means that this could take quite a while.
Following this agreement, ESMA, the European Securities and Markets Authority drafts the detail of the rules that have been set out in the political text, these are then passed back to the Commission for final adoption following close scrutiny by the Parliament and Council to ensure they are in line with what was previously agreed. The text is then ready for implementation.
By my estimates, that means the most likely timeline and implementation of MiFID II and all of these rules is likely to be January 2015.
The one thing I hope you all realise is that 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.


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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')



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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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