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The long-anticipated consultation for the UK Wholesale Markets Review has finally arrived. Effectively an opening salvo, the consultation was published on 1st July. The scope of the review is broad, with many aspects of the current MiFID II regime being subject to scrutiny, and in some cases potential repeal.
The ambition is bold. The government aims to: “determine how the UK’s approach to regulating secondary markets needs to adapt following the UK’s withdrawal from the EU”, and “ensure that the framework continues to cater for future challenges and opportunities”.
But the consultation is notably lacking in big ideas. Tinkering and evolution are the order of the day, and in some cases perhaps even a step back in time to an approach more akin to MiFID I.
Much ink will be spilled as the consultation moves forward, and legislative proposals begin to emerge. For now, it’s useful to consider some of the more eye-catching, or useful, proposed changes.
Clarifying the regulatory perimeter for trading venues
Even with a fairly significant amount of guidance emerging from ESMA, the regulatory perimeter for trading venues has a maddening degree of shades of grey. In the run up to MiFID, many firms adapted business models or exited certain types of trading altogether, to avoid the much tougher standards that being classified as a trading venue attract. Many such firms then looked on in bemusement as some of their competitors carried on without change, still believing they had skirted the trading venue definition.
Wealth managers and asset managers are likely to be the most hopeful, seeking clarification that systematic internal crossing of clients and funds positions will explicitly be excluded from any future definition. Smaller brokers and novel, technology-driven, crossing networks will likely lobby hard to remain out of scope.
The end of the share trading obligation and the double volume cap
Already trailed in speeches by the regulator, it is little surprise that both the share trading obligation and the double volume cap are potentially for the axe. Both moves would potentially offer far greater flexibility in how transactions in shares are executed, at the expense of traditional stock exchanges and other lit venues.
But it remains to be seen how much liquidity will drain away from lit markets without these measures in place. There is a risk of real detriment to price formation, and to smaller investors, if significant amounts of liquidity go dark.
Greater flexibility for SME listings
There is a delicate balance at play when it comes to disclosure requirements for smaller firms looking to list – too much red tape and they will be dissuaded from listing, driving them towards other means of financing, too little and there is a risk to investors, who will be insufficiently informed.
The review clearly sees an imbalance in favour of the former, and seeks comment on whether disclosure rules could be relaxed. This is particularly interesting in the context of greater use of crowdfunding and a growing trend towards tokenisation of assets, with standards for this form of capital raising often far more flexible than the listing rules for an SME.
A return to qualitative criteria for Systematic Internalisers and the Ancillary Activity Test
The complex calculations embedded in MiFID II, aimed at creating greater clarity as to the aspects of the regulatory perimeter, have been a significant headache for many firms. As such, it is little surprise to see two of the most complex calculations being slated for an overhaul, most likely to be replaced by qualitative criteria.
However, the original motivation for quantification was the perceived failure of qualitative rules under MiFID I. As such, there will clearly be a challenge in reaching a sufficiently definitive crafting of qualitative criteria, to avoid a similar outcome. Of particular interest will be the Ancillary Activity Test for commodities, which may see many firms who had only recently resigned themselves to the rigours of regulated status, being freed once more.
Transparency for Bonds and Derivatives Markets
One of the biggest experiments embedded in MiFID II was the extension of equity-like transparency frameworks to less liquid bond and derivative markets. Despite the noble aim of making these markets more efficient, it was always going to be a challenge to find a framework which worked for such a diverse array of instruments, trading mechanisms and liquidity levels.
The consultation hints at a more enlightened approach, retaining some measures for the most liquid instruments, while repealing them for others. This is likely to be cheered by the firms churning out large amounts of pre- and post-trade transparency data for instruments where it is unlikely to really contribute much to the more efficient and effective functioning of their respective markets.
The consultation, which closes on 24th September, can be read in full here: UK Wholesale Markets Review: a consultation.
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