In-depth introduction: Mifid II

New rules have the power to transform markets - and baffle participants

Duncan Wood, editor

"It was not really what I wanted to get under the Christmas tree," a Dutch member of the European Parliament (MEP) told an industry conference in Amsterdam on June 4, as Risk was going to press – a remark with wider relevance than might initially seem the case.

The MEP was Cora van Nieuwenhuizen, and her unwanted present was the latest consultation paper on the overhaul of Europe's trading and transparency regime, the review of the Markets in Financial Instruments Directive (Mifid II). All 2,000-or-so pages of it were published on December 19 last year.

Her remarks were significant because Van Nieuwenhuizen is one of the parliament's rapporteurs for Mifid II, and because her disapproval was not just about the timing of the consultation.

The proposals are too complicated, she told the audience at the annual meeting of the International Capital Market Association; they are also overly prescriptive, she said. The aim should be to produce rules that are "workable and pragmatic".

She is right. As a rapporteur, Van Nieuwenhuizen has to care about Mifid II – she may even have had to read it all – but many of the thousands of market participants that will be directly affected by the rules will not make the same investment of time. They will not realise yet that a big dealer will be classed as a systematic internaliser (SI); they won't know that trading a liquid swap with an SI will subject them to the same pre- and post-trade transparency rules as if they were using a trading platform; and it is even possible that they are unfamiliar with the class-of-financial-instruments-approach the rules apply to the definition of liquidity. And that is the simple stuff.

It's why the two articles that make up this in-depth section (here and here) attempt to tie the organising concepts of the regulation back to the real world. What does Mifid II actually mean? Among other things, it may mean it becomes more difficult to execute package trades - a popular way of minimising execution risk. It may also mean dealers are no longer willing to provide better prices for their best customers, or to trade small tickets over the phone. And it may encourage market participants to trade with small banks instead of the more heavily regulated SIs.

All of those outcomes may be exactly what regulators intended – and may be good, sensible things – but entombing them in a vault of paper and jargon helps no-one.

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