Many firms have stopped work on planning for the implementation of the Markets in Financial Instruments Directive (MiFID) because of practical concerns over proposals from the Financial Services Authority (FSA) for the possible introduction of price benchmarks, says the London Investment Banking Association (Liba).
The association has added its voice to the criticism mounting against the FSA's proposals and argues that the benchmark proposal is "distracting scarce resources from the essential task of implementing Mifid on time".
The proposals were outlined in a FSA discussion paper released two months ago which outlined an additional option for providing best execution in dealer markets, based on the use of benchmarks.
Liba goes as far as saying that the proposed transparency regime, including calls for the disclosure of firms' internal risk models, could eventually drive business out of London.
The association says: "If an agency market were to be imposed in the UK by means of over-regulation in this way, there would be a risk that the market would move 'offshore' just as the Eurobond market originally developed in London in response to changes to tax law in the US."
The benchmarking proposal could also create a dysfunctional market structure, says Liba. By promoting the use of e-trading systems to obtain the price data required for delivering and monitoring best execution, the proposal fails to recognise the importance of a voice market in the price formation process. This could lead to a distortion in the market in favour of dealing via an electronic "request for quote" model in an MTF market, which would not be required to deliver best execution under MiFID.
The measures would also increase the cost of data capture and would require major changes to data systems and storage. Liba says firms would have to build new systems for capturing data for external referencing including - in the dealer markers - data from rival firms and from trading platforms and voice brokers with whom they have no relationship.
Liba says the bechmarking proposal would be "unworkable and unwarranted", could damage the competitiveness of the dealer markets and would be inconsistent with MiFID itself.
Earlier this month the International Capital Market Association (Icma), the International Swaps and Derivatives Association (Isda) and The Bond Market Association (TBMA) raised their concerns in response to the FSA proposals and warned that the imposition of benchmarking would be expensive to implement in practice and could potentially lead to withdrawal of liquidity.
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