The European Commission set out its third wave of reforms in six years to raise the profile of the region’s financial services industry and bolster the much-heralded Capital Markets Union (CMU) which suffered a blow when the UK left the bloc last year.
Mairead McGuinness, the Commissioner for financial services said, “We are taking another step towards a strong, resilient CMU. It is vital for long-term economic growth. It will help finance flow towards the green & digital transitions while ensuring the EU remains competitive globally.”
The initial plans for a CMU were set out in 2015 by McGuinness’ then British predecessor Jonathan Hill with a promise for it to be in place by 2019.
“Brexit has had an impact on the whole financial system of Europe, because London was a financial centre [that was] part of Europe,” said McGuinness.
“It is now in a third country. And that clearly has consequences both for London and indeed for the European Union.”
“In my view, it does mean that we need to work as quickly as we can and as effectively as we can to develop both our capital markets and indeed to advance banking union,” she added.
The reforms call for the creation of a consolidated tape for equities, exchange traded funds, bonds and derivatives in as real time as possible as well as the development of the European Single Access Point which will be akin to EDGAR, the system used in the US for reporting corporate information and mandatory filings.
They also call for the reduction of the double volume cap (DVC) for dark trading from 8% to 7% as well as the removal of the venue-specific 4% DVC.
In addition, changes have been proposed to the systematic internaliser (SI) regime that could drive more trading away from SIs onto lit exchanges. These include preventing MTFs from using the reference price waiver to execute small trades by introducing a minimum threshold as well as restricting SI’s ability to match small trades at midpoint.
Also, on the list are limiting their ability to match at mid-point to when they are trading above twice the standard market size but below the large in scale (LiS) threshold. When trading above large in scale, SIs will continue to be allowed to match at mid-point without complying to tick size.
The Commission also proposed prohibiting payment for order flow for “high-frequency traders organised as SIs”. Venues will instead have to earn retail order flow by publishing competitive pre-trade quotes in yet another move to level the playing field between execution venues.
“These proposed changes put an even greater emphasis on financial institutions needing to handle most of their order volume automatically, while still having the ability to work larger orders with care where required,” says Sylvain Thieullent, CEO of trading systems provider Horizon.
He adds, “At the same time, they also need to be continuously refining their market making approach to reflect technical advancements.”
Thieullent also believes that “the absence of a comprehensive agreement has opened up possibilities for regulatory divergence. ESMA and the FCA can think more pragmatically about their regulatory future and what they can do to support their trading ecosystems that they couldn’t before.
This presents operational challenges, but it forces firms to review existing structures and the shakeup to traditional market structures sparks change that will address legacy inefficiencies.”
The proposals will need approval from the European Parliament and EU states to become law, although compromises are expected.”
©Markets Media Europe 2021
