Jul 10, 2015

MiFID II, set to come into force in January 2017, lays out a vast change in how and where trades are executed and reported. This ambitious Directive seeks to make financial markets more efficient, resilient and transparent in order to strengthen the protection of investors. Whilst much of the Directive has been contentious, debate has focused upon the expansion of MIFID I’s transparency requirements to include OTC derivatives. In particular, there is a view that the implementation of those requirements across the OTC derivatives markets may reduce liquidity, potentially sowing the seeds for the next financial crisis.

What are firms concerned about?

Although many of the reforms in MIFID II are expected to be positive, firms have raised concerns that it will come at the price of reduced liquidity, particularly in fixed income, derivatives and commodities markets.

The Association for Financial Markets in Europe (AFME) believe “liquid capital markets, and a well-functioning banking system, are central to any successful modern economy”, a characteristic which is in danger of being compromised by MIFID II. A survey carried out by AFME of 100 buy side firms produced a response similar to that found by many other firms. It is clear from the results that firms believe MiFID II’s transparency requirement will have a detrimental impact on liquidity when current bid and offer prices are made public for equity and ‘equity-like’ instruments.[1]

There were arguments from firms in favour of increased transparency. One respondent to the survey suggested a central price publishing register for OTC trades would reduce the number of complications faced during end of year audits. However, the consensus amongst the majority was that there will eventually be a buy-to-buy side, as current liquidity providers are driven out by over regulation.

The view that over regulation could in fact be the beginning of the next financial crisis has been echoed by opinions from senior figures at major sell side dealers who have claimed onerous regulation has caused violent market swings. The October 2014 ‘flash crash’ in US Treasury securities has been used as an example of how volatility could be caused by reduced liquidity, due to banks having to comply with ever more stringent regulatory rules.[2]

It is clear that an increased level of transparency is necessary to protect investors. However, it is also clear from the reaction of firms that ESMA, when creating technical standards, finds the right balance between ensuring investors get the information they need whilst preserving liquidity.

What are the regulators and ESMA saying?

The industry debate on ESMA’s guidelines for MIFID II has been led by prominent figures including FCA Chief Executive Martin Wheatley. He has previously noted his view on the importance of “getting the nuts and bolts of regulatory reform right so markets remain deep and liquid”.[3] Most recently, he has described the expansion of the transparency rules under MIFID II as a “crude measure” driven by “political impetus”.[4]

Verena Ross, an Executive Director at ESMA, has publically defended ESMA’s advice, arguing that “MIFID II’s mandate is directed toward “increasing transparency in a way that does not ‘damage’, but instead improves, the functioning of the market” [5]. She also highlighted that, for transactions using instruments that are not defined as having a ‘liquid market’, the option remains to waive pre-trade transparency and defer post-trade transparency. However, the methodology for assessing market liquidity itself attracted controversy, which is unlikely to allay industry concerns given the ambiguity that remains.

Is it too late to change the rules?

Yes. ESMA’s consultation paper on MIFID/MIFIR’s technical standards was published on 19th December 2014. The consultation period closed in March this year and the final report was published on the 29th June 2015. Remaining technical standards are expected to be published by the end of 2015.[6]

What should firms do now?

Firms are now expected by their regulators to be actively working on implementing MIFID II. With less than 18 months until the date the directive comes into effect, implementation should be a priority to ensure they are not penalised financially for non-compliance. [7] Sitting back and waiting is not an option. Developing systems and processes to sustainably comply with the Directive should be a critical focus, with particular attention on completion and accuracy of reporting processes.

Time will tell whether the new rules under MIFID have gone too far. The Directive may be central to creating the kind of market stability and transparency required to restore public confidence in the financial system. However, despite best intentions, it is possible the foundations of the next crisis are being laid. For now, all affected firms can do is to prepare for implementation, and be ready to face MIFID II, whatever the impact that lies ahead.

2 “Anshu Jain in Davos regulation clash with Jack Lew and Mark Carney” Retrieved from the Financial Times website:,Authorised=false.html?

3 “Looking ahead to 2014” Retrieved from the FCA website:

[4] “From intellectual certainty to debate” Retrieved from the FCA website:

5 “Switching on the light without turning off the tap” Retrieved from the ESMA website:


7 “MiFID II implementation: on target, or on the regulator’s list?” Retrieved from