SUMMARY
The original Markets in Financial Instruments Directive
(MiFID I), which came into effect in November 2007, aimed to increase
the competitiveness of EU financial markets and to facilitate
competition between traditional exchanges and alternative venues.
The European Commission has brought forward proposals,
known as MiFID II, to reform and extend this regime. This is a
complex and significant legislative package that seeks to regulate
hitherto less regulated markets in line with G20 commitments.
We conclude that a review of MiFID I was necessary, and that some
of the Commission's proposals are based on sound principles. Nevertheless,
the proposal contains fundamental flaws which need to be corrected
as a matter of urgency if serious damage to the EU financial services
industry is to be avoided.
Notably, the proposals in relation to third country
access are ill-conceived. There is a risk that, if introduced,
the provisions could lock third country firms out of the EU markets,
which would have an extremely damaging effect on European financial
markets, including the City of London. Given that global financial
markets are independent of geography, it will also be wholly impractical.
We also fear that an unsophisticated advance to greater
transparency could undermine the liquidity and innovation of these
markets. Thus on pre-trade transparency, we understand the thinking
behind the Commission's proposals, but it is important to acknowledge
the markedly different characteristics of each sector of the market,
in particular in terms of their liquidity. A one-size-fits-all
approach to pre-trade transparency must be avoided. There could
be serious repercussions for the entire EU financial services
industry were the leading position of the UK within the global
financial sector to be undermined because of this approach. It
would also have a negative impact on innovation.
There is considerable uncertainty regarding the implications
of the proposals for a new category of Organised Trading Facilities
(OTFs), aimed at ensuring that all organised trading is conducted
on regulated trading venues, and in the proposal to increase regulation
of algorithmic and high-frequency trading. The proposals on investor
protection and corporate governance are also flawed.
We conclude that the MiFID II proposals have been
rushed, and risk creating confusion rather than providing clarity
in terms of the regulatory framework for investment. It is more
important to get the proposals right than to get them passed quickly.
Given the potential implications both for the UK financial markets
and for the EU financial sector as a whole, we urge the UK Government,
in liaison with the Commission, the Council, and, in the context
of its important co-decision powers, the European Parliament,
to play their full part in the negotiations on these important
proposals.
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