Dealer platforms weigh up life under Mifid
Weighing up life under Mifid
The Markets in Financial Instruments Directive creates a new type of trading venue for the execution of over-the-counter derivatives and, as things stand, dealers’ existing platforms do not qualify. Joe Rennison analyses the potential for a reprieve
There were 14 escape attempts from the famous Alcatraz prison before it closed in 1963. Some were more sophisticated than others – one man climbed a fence, and was shot for his troubles; two filed through the iron bars covering a window, but were swept out to sea; and a group of four prisoners succeeded in escaping following a meticulously planned operation that involved, among other things, accordions, soap, an improvised drill and a raft made of stolen raincoats.
Single-dealer platforms (SDPs) need to pull off something similarly daring to avoid being locked away from the over-the-counter market by the Markets in Financial Instruments Directive (Mifid), which describes three distinct categories of trading venue on which standardised OTC derivatives can be executed – organised trading facilities (OTFs), multilateral trading facilities (MTFs) and regulated markets. OTFs are closest to the model dealers would like to see used in the OTC market – and were introduced by the European Commission’s (EC) draft version of Mifid last October to meet the Group of 20 (G-20) nations’ commitment to trade standardised OTC products on exchanges or electronic platforms. But dealer platforms currently do not qualify.
There are a number of possible escape routes. Banks could file through the bars that keep them out of the OTF category; they could jump the fence into a different category, becoming systematic internalisers (SIs); or they could construct a completely new type of platform – venues that aggregate other OTFs. But there are pitfalls with each of these options and, if none of them work, single-dealer platforms may be unable to touch standardised OTC products.
Many banks hope Europe’s authorities can be persuaded to change the description of OTFs in Mifid. “I don’t believe an SDP meets the proposed requirements to become an OTF. Despite this, we feel they are appropriate and hope to show the European Parliament and council that they satisfy the G-20 trading obligation,” says Eric Litvack, chief operating officer of global equity flow at Société Générale Corporate & Investment Banking.
Litvack is not alone. Barclays, Crédit Agricole, Deutsche Bank, ING and Royal Bank of Scotland all submitted comment letters during the Mifid consultation making the same case. And a number of others – including BBVA, Citi, HSBC, Lloyds Banking Group and Morgan Stanley – criticised elements of the OTF criteria in their own comment letters. That’s no surprise. The best-known SDPs – such as Barx and Autobahn, which belong to Barclays and Deutsche Bank, respectively – represent years of work and, by some estimates, more than $100 million of investment. The platforms could, of course, continue to trade products that are not subject to the G-20 mandate – however that is defined – and could also trade non-derivatives products. But that would still be a painful outcome.
I don’t believe an SDP meets the proposed requirements to become an OTF. Despite this, we feel they are appropriate
“This matters hugely to every bank. It’s bottom-line stuff,” says Christian Krohn, a managing director at the Association for Financial Markets in Europe. Even the UK’s Financial Services Authority submitted a comment letter calling for single-dealer platforms to be allowed to trade derivatives subject to the G-20 mandate.
The EC proposals describe OTFs as platforms that bring together multiple third-party buying and selling interests. They also state that operators of OTFs cannot deploy their own capital on the platform, and must rely instead on other market-makers to provide liquidity. SDPs fail both tests – the owner is the only market-maker and uses its own capital in doing so. The reason Mifid gives for preventing the operator of an OTF from deploying its own capital is to ensure it remains neutral, preventing any conflict of interest. Banks see that as overkill.
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