Welsh Conservatives in the European Parliament
Dr Kay Swinburne MEP

Xtrakter 19.05.11

My presentation today will focus on some of the key topics that will be covered by the MiFID review - or MiFID II. Namely, its scope, the discussions that are occurring in the equities space around Broker Crossing Networks, HFT and algos and the proposed changes to market structures aimed at protecting market integrity and ensuring a level playing field.
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 – the fallout from the financial crisis, and the requirements to review the MiFID legislation 3 years post-implementation – 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 the large MTFs like Chi-X and BATs has become a reality. And transaction costs have been significantly reduced.

However, when talking about the intentions of legislators with regard to MiFID II we can not 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. Just because something didn't cause the last crisis does not mean it could not prove to be the cause of the next one- therefore two new objectives need to be added to increasing competition, investor protection and transparency, namely that of increasing financial stability and reducing systemic risk. Previous exemptions and reasoning behind some of the components for MiFID will and should now be questioned in the light of these new objectives.

My formal role in parliament as Rapporteur of a report ‘Trading in Financial Instruments: Dark pools and high frequency trading’ mainly focussed in on the equities markets so I will focus my comments to a large degree in this area.

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. Firstly, the US discussion over the need to create a new trading platform for the derivatives products in order to meet the G20 commitments in this area. The creation of the concept of an American Swap Execution Facility 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 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 of encouraging trading onto electronic markets where appropriate, as opposed to encouraging trading onto exchanges is what this new definition is in answer to. While 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. While the Commission has come under some criticism for not providing a more strict structure for the OTF definition, this is precisely why I think it can be made to work.

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 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. Yet when I suggested that many of the activities described were matters that should be reported to supervisors, it seemed evidence was not forthcoming to back up these accusations - much of it was actually rumour or misinformation. However, it brought me to the same conclusion as the G20, that transparency in the markets and market structures was the key.

If Broker Crossing Networks really were providing a necessary function to investors that they genuinely required, and the BCNs weren't operating a business model comparable to an MTF then they should have no problem opening up their business model to regulators. Explaining how their BCN matches orders on a discretionary basis and complying with a list of parameters that set them apart from multilateral trading venues should not be an issue. 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. Using this model for a BCN, many then concluded that if the amount of orders executed there hit a certain threshold then maybe there was an argument to be made such that they would be required to convert to an MTF.

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 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 an edge, HFT firms invest in huge amounts of often 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 done it with the rest of the market.

However, it is this lack of direct supervision and opacity that has led to suspicion in the market place over precisely what the HFT firms are doing to generate the year on year returns that they have done 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, regulators can no longer view HFT and algorithmic trading in a completely neutral way. With new technology comes new dangers, requiring new rules to compensate for new risks.

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 should be considered abusive or treated as market manipulation.

To focus on the structural questions that MiFID II will address, some relate to how MiFID was interpreted and others more directly to how the market has evolved. Most HFT firms in Europe operate under an exemption in MiFID that allowed for those operating using their own capital to avoid registration with a national regulator and to be exempt from the supervision that banks and investment firms are. The logic behind this at the time had more to do with the US concept of a high net worth individual, as opposed to a multibillion euro hedge fund. However, in the pre-financial crisis mindset, it was assumed that if it was your own capital at risk and you were the only one who was going to lose money if you made risky decisions, then it was up to you what safeguards you followed.

Following the crisis and since May 6th Flash Crash, the level of interconnectedness of the financial system has called this judgement into question. If one of those unregistered multibillion euro hedge funds’ algos went rogue - or if their strategy was simply flawed - would they have enough capital behind them to honour traders? What would be the result of that collapse on the rest of the market? The bottom line being, are the markets resilient enough for today’s trading methods?

MiFID II will ensure some safeguards for the system - proprietary trading firms of this kind will, under MiFID II, be required to submit to supervisory scrutiny. Some national authorities have already interpreted the exemption in this way and many national regulators will make the necessary changes before MiFID II comes into force.

Beyond this basic change, 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 - so how close you were to the centre of things and who you were standing close to. 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 through the pipeline.

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, they must ensure that co location is granted and sold on a transparent and non-discriminatory basis, so all market participants who 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 fact that if something goes wrong with the outside firms trading strategy it is the Exchange members name and capital that is potentially at risk, they should already have strong incentives to keep a close eye on anyone they are working with - however, 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 - yet another hugely firm sensitive, expensive and protected area.
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.

When this proposal came out, many took it to its extreme and thought regulators would literally be required to go deep into the quant world and line by line understand complex trading algorithms. Considering that some of the smartest and highest paid people in the world are involved in their development it was considered beyond the skill set of national regulators to be able to undertake this function. However, I have to stress, that this is not the aim of my proposal - and I'm relatively sure that it was not the Commission's aim in its consultation paper either. Already, some of the regulators scrutinise and ask questions about firm's algorithms looking for their motivation; this does not require understanding of the complex maths. MiFID II will simply seek to embed this 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.

The last area of MiFID that I would like to address relates to something that high frequency traders rely on - 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 as a Conservative MEP it is a huge source of frustration for me 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, 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 will 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 that the US is currently looking at 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 a limit up limit down break on trading, to replace the very 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.

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. 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 during 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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