Increasing Stability and Reducing Risk

Edouard Vieillefond of Autorité des Marches Financiers looks at the factors that contribute to financial stability and how investor choice needs to be balanced with investor protection, market fairness and efficiency concerns.

FIXGlobal: How can the Commission and the European Securities and Markets Authority (ESMA) ‘encourage’ institutions to trade via multilateral facilities?

Edouard Vieillefond, Autorité des Marches Financiers (AMF):
Market transparency, efficiency and integrity are essential to financial stability and to ensure that financial markets continue to play their core role of financing the real economy.

In the context of the financial crisis, in 2009 the G20 leaders declared that “all standardized over-the-counter (OTC) derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest”. In order to implement these objectives, in 2012 the International Organization of Securities Commissions (IOSCO) identified some key characteristics that electronic trading platforms should fulfil in this context, amongst which were pre- and post-trade transparency and “the opportunity for platform participants to seek liquidity and trade with multiple liquidity providers within a centralised system”. We believe that this multilateral criteria, which is not consensual amongst regulators, is absolutely essential in defining what a trading venue is and ensuring the real efficiency of the price formation process on financial markets.

As regards the perspective of the MiFID review, in Europe the Commission proposes an obligation for derivatives to be traded on multilateral trading venues, which shows progress in the right direction. On cash securities, unregulated trading has developed over recent years, including in the fully OTC bilateral space. The Commission’s aim of catching all these new trading spaces within a new EU regulatory framework is a positive one. However, without clearly defining the boundaries of the European trading environment, it leaves aside the possibility for new trading concepts to be developed, including bilateral ones. It also leaves aside more structural issues – such as the role that we want financial markets to play in the near future with regards to the real economy. An essential first step for legislators and regulators in Europe would therefore be to define in greater detail what the EU trading space shall consist of; and then to incentivize trading of standardized and sufficiently liquid financial instruments on genuine trading venues such as exchanges and multilateral trading facilities (MTF).

FG: Where is the balancing point between investor choice and encouragement towards certain venues?

EV: Investor choice is of course to be kept fully flexible but also, on the regulatory side, to be balanced with investor protection, market fairness and efficiency concerns.

In Europe, MiFID has led to excessive market fragmentation, despite the legitimate intention of the directive to enhance competition between exchanges and multilateral trading facilities. This approach has produced very mixed results, including no real overall cost reduction for final investors, an increase in dark trading and a decrease in the quality of pre- and post-trade transparency to the detriment of the market as a whole.

If financial markets are to remain a reference and to serve investors and the real economy, an essential step in reviewing MiFID is to ensure that orders be primarily executed on genuine trading venues. So, a clear distinction must be made between trading venues where prices are formed according to transparent, non-discretionary and publicly known principles that reflect real supply and demand (exchanges and MTFs), and the other trading spaces. To that extent, it is not possible to consider broker crossing networks (BCNs) and therefore organised trading facilities (OTFs) as equivalent to regulated markets (RMs) and MTFs as they do not offer the same degree of transparency (and hence efficiency) of the price formation process. Crossing networks should at best be considered as an intermediate way to execute transactions, for residual transactions that do not constitute addressable liquidity or with a very strict ceiling above which those BCNs should be transformed into truly multilateral MTFs.

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