How has regulation shaped your world?

I don’t know if anyone can ever define a victory something that will lead to further delay in implementing one of the most important piece of legislation since Mifid I.

But what we can say is that we were expecting it.

We have been very vocal during the latest approval process for MiFID II by taking an active role during the relevant consultation process as part of buy-side working group and through industry association. And I can tell you that during our meetings and trip to Brussels, we have realised how little the buy-side and sell-side was conflicted in this debate. At the end of the day, our shared concern was to ensure that we do not lose the ability to invest money efficiently for our clients.

Our view is that policymakers did not take on board enough feedback from the industry during the approval process. Usually the normal approach provides for intense consultation and evidence through lobbying. This was not the case in the current regulation reform approval process where it seemed that the nature of the process became soon highly politicised with most member countries and MEPs that took a philosophical approach on topic like “more transparency is always good, less transparency is always bad.

Unfortunately this is not true.

The risk is that the new legislation in the best case does not address the issue that was supposed to address and in the worst case it brings unintended consequence. In both cases it is a missed opportunity.

We envisage a greater role for supervisors, central banks and regulators towards creating a financial market environment where investors are protected by predatory behaviours and fair competition can be established among all market participants.

With particular reference to transparency, we reiterate our view that an appropriate level of transparency is necessary and beneficial. However, transparency should be a mean to bring certain benefits to the end investors and not an objective itself.

We remain convinced that transparency is strictly correlated with liquidity and does not work for all markets. So, we are in favour of the development of stricter transparent obligations as long as it enhances the price formation process and brings benefit to the end investors. We feel that the extension of pre-and post-trade transparency requirements without a proper calibration to the less liquid part of the market will harm liquidity rather than improving it.

We feel that a post-trade transparency regime supported by a level of calibration capable of ensuring that market makers can absorb the risk and to protect liquidity across less liquid instruments might provide the transparency the market is looking for.

It is pointless to say that we are not against transparency. However, if the so-called “equitization” of fixed income market means forcing full transparency, irrespective of the asset class traded, liquidity, the type of order or the market conditions, then this is wrong, simply because it will deteriorate the price formation process.

In the more illiquid markets, the extension of pre-trade transparency without a proper calibration to the less liquid part of the market could have a number of undesirable effects, such as:

·         harming liquidity, as market makers will either widen their spreads (increase cost of trading) or step away from the market (liquidity deterioration). Dealers that win a trade responding to an RFQ on an MTF will see their ability to hedge the position compromised by the information leakage to the losing dealers that can now take the contrarian market position.

·         Increasing  the cost of funding for all issuers as they have to offer a premium over secondary market (which in turn might already be trading at a wider spread in high volatility time)

·         Agency model will concentrate trading only in liquid debt (issue for SME and project financing), de facto impacting the ability of SME and Infrastructure Projects to access financing, raise capital, fund their activities, grow and create jobs

I think we make no mistake if we say that the main target of MIFID I was to bring down the cost of transaction for investors and secondly, to facilitate the creation of a large secondary market which could eventually enhance liquidity.

There appears in fact to be a public consensus that while MIFID I was a success as competition became a reality, there were a number of side-effects:

1)      THE FIRST ONE IS LIQUIDITY: MIFID I is now widely recognised as a complete failure in terms of enhancing the level of liquidity in lit markets and instead had a devastating effect for liquidity. It has increased fragmentation of liquidity across more trading venues, which has made it more difficult for the buy-side to understand where the liquidity is. Where before there was a single provider of liquidity, now we see a proliferation of alternative venues, both lit and dark.

So MIFID 2 review was an opportunity. An opportunity to learn from the mistakes and counter effects brought my MIFID I and eventually ensure that financial markets serve European investors’ needs.

 We believe that MIFID II should restore truth in Europe’s financial markets, by encouraging fair price formation, efficient capital allocation, returns for savers, risk mitigation tools and eventually market that deliver social benefits because let’s not forget that European citizen do finance the real economy through their investments in pension funds, UCITS, Insurance plans.

-          significant reduction of liquidity in the secondary market

-          which might in turn lead to widened spreads

-          greater cost of trading

-          lower liquidity across exchanges

-          Eventually worsening significantly the quality of the execution for the end customers, the long-term savers.

What we said to the regulators in Brussels was that we needed to keep the interests of long-term investors at the centre of discussions . We have brought to the attention of the regulators three main concerns: