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NEWS RELEASE: Draft proposals from Europe for new prudential rules for investment firms indicate that start-up and early stage trading platforms may well be the winners from the changes. But the new rules could catch out small to mid-tier firms because of the amount of work they will need to do to become compliant.
The alternative platforms market (also referred to as the MTF/OTF market, as these firms fall under the MiFID II multilateral trading facility (MTF) and organised trading facility (OTF) definitions) in Europe has grown rapidly in recent years. The sector has been boosted by increasing competition with traditional asset classes and significant interest in the innovation offered by new platforms for cryptocurrencies, digital assets and tokens, and secondary markets for issuance’s from crowdfunding.
Under the proposed new prudential regime, all trading platforms within the MTF/OTF market will see their minimum capital requirements slashed from €730k to €150k, a very significant reduction in their overall prudential burden. The proposed regulations, which are likely to be agreed by the EU in the next month or two could come into force by Q3 2020.
Damon Batten, Head of Markets and Managing Consultant at Bovill, said:
“On balance, this reduction in the capital requirements for alternative trading platforms seems very reasonable – as a rule these platforms introduce very little risk into the wider financial system, functioning only to connect buyers to sellers. Their principal risk is operational – that their failure or outages could disrupt trading.
“We work with a wide range of trading platforms across the EU, US and Asia, and the message we consistently hear from both established players and start-up platforms looking to bring new concepts to market is that the barrier to entry in the EU is very high. This reduction in capital requirements will be a significant lowering of that barrier for newer firms.
“However, the compliance burden for new entrants for new firms remains high – with significant requirements stemming from both MiFID II and MAR. If the EU is serious about continuing to be an attractive destination for trading venues, a simplified regime for smaller venues would be another huge step forward.”
Harpartap Singh, Head of Prudential and Managing Consultant at Bovill, said:
“The existing prudential regime is tailored towards banks, and isn’t fit for purpose for asset managers and certain investment firms, as it forces them to address risks that aren’t risks for their sectors, such as taking haircuts on balance sheet assets. The upside is that the new rules are far more appropriate for investment firms. But it may mean a big step up in terms of regulatory compliance.
“Firms will likely need to get geared up quickly – the rules will probably come into law within a month or two, and companies will have 18 months to comply after that. Software, procedures, and training will all likely need to change. This could be a big ask for small to mid-tier firms, which may find resourcing these changes more onerous.
“Even in the event of a disorderly Brexit, we believe it is likely that these rules will be applied in the UK, given the significant degree to which the FCA has been involved in the drafting process.”
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