While the original MiFID contributed to a more competitive and integrated financial market in Europe resulting in higher transparency as well as better protection for investors, some market areas were not touched by the regulatory framework. Technological advance, the rise of more complex instruments and the growth of high-frequency trading and dark pools made it necessary to review market structures as part of MiFID II.

Areas not covered so far include: specialised trading firms, such as commodity traders; specific instruments, such as equity-like products and commodities, and; services, such as ancillary custody services.

The legislative proposals for the revised MiFID framework aim to maintain investors’ confidence in the financial markets and create a safer and more stable EU financial system. Changes to the market structure under the proposed directive and regulation include:

• Provisions for a new trade venue – the Organised Trading Facility(OTF) – to regulate any trade venue that were not in scope of the original MiFID; 
• Mandatory trading of standardised derivative instruments on electronic venues;
• New rules for Systematic Internalisers (SI);
• Alignment of the organisational requirements and market surveillance across all regulated trading venues: Regulated Markets (RM), Multilateral Trading Facilities (MTF) and OTFs;
• Additional rules for the suspension of trading of financial instruments;
• Specific rules to give trading venues and central  counterparties (CCPs) non-discriminatory access to one another;
• Specific rules regarding position limits in commodity derivatives.

With these new provisions, the European Commission intends to create a single market for investment services with a level playing field, in which all organised trading is conducted on regulated trading venues with an alignment of all organisational and market surveillance requirements.

Organised Trading Facilities

OTFs are any system or facility, other than an RM or MTF, operated by an investment firm or market operator, in which multiple third-parties buying and selling interests in financial instruments are able to interact in a way that results in a contract.

OTFs therefore capture: any form of trading outside existing regulated trade venues; broker crossing networks and; standardised derivatives trading.

There continues to be a heated debate around three particular aspects:

• Should only non-equity instruments be covered by OTFs?
• Should matched-principal trading be allowed for equities?
• Should the proprietary capital restriction be included in the final text?

The EU intends to remove existing loopholes and prevent new ones from being created in the future.

Systematic Internalisers

Systematic internalisers, as a separate execution venue created under MiFID, have been non-starters (just 13 are registered under ESMA today). This is mostly due to the fact it is particularly difficult to define which activities can currently fall in this category and unfortunately the lack of flexibility for providing pricing and liquidity did not help to get more attraction from firms to become a SI. Most of them have decided to restructure their activity in order to avoid the regulation.  

Regulators now want to improve pre and post-trade transparency to help market participants get a clearer ‘unbundled’ picture of where liquidity is in the markets.

With the revision of MIFID, a significant portion of OTC products will move to organised execution venues with appropriate transparency rules in place. That will not significantly change the use of existing execution venues for equities trading. With the ongoing trialogue discussions it remains to be seen how complex the new world of trade venues will become and if a similar proliferation will be seen as we have experienced in the equities space. 

For now, only the transparency and discretionary rules can be considered as being carved in stone for all the trading facilities.