| New sources of liquidity to open up with the Directive on markets in financial instruments |
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| 07/11/2004 | |
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The final adoption of the Directive on Markets in Financial Instruments (DMFI - previously called the Directive on Investment Services II) on April 21st 2004 by the European Parliament was one more step towards the establishment of a European market of financial instruments. European Union Member States now have two years from the adoption date to implement the directive in their national legislations. The DMFI is part of the European Commission's Action Plan for Financial Services (APFS) for 1999-2004 that now has its sequel with the APSF for 2005-2010. The APSF seeks the creation of a homogeneous European capital market that would be both safe and efficient, while guaranteeing competition among capital market players. One of the main objectives of the directive is to organise the regulatory architecture of the European market around the multiplication of trading platforms, increasing the competition between the various sources of liquidity and de facto ending the order execution monopoly of traditional stock exchanges. The DMFI allows the processing of a client's order outside regulated markets via alternative trading platforms, also called Multilateral Trading Facilities (MTFs), as well as the order internalisation under certain conditions, while strengthening the transparency principle. This should further protect the investor and clarify competition rules between market players. The end of regulated market monopoly: evolution or revolution for the negotiation system? The directive ends the requirement to execute orders through regulated platforms such as stock exchanges. MTFs and systematic internalisers, which are defined in the directive as investment firms which, on an organised, frequent and systematic basis, deals on own account by executing client orders outside a regulated market or an MTF, will now be on an equal footing with traditional trading platforms. In the end, the emergence of alternative trading platforms and MTFs as new liquidity sources will deeply impact the price formation process. Instead of a bid-offer price range set through order comparisons, various ranges will be proposed, increasing the focus on transparency, equity, and best practices. In turn, limit orders that are not immediately executed by an internaliser will have to be transmitted on the regulated market or on alternative trading platforms. The issue of transparency In order to foster transparency, new price publication rules apply to regulated markets and MTFs: -Pre-negotiation, the publication of the bid and offer prices, as well as the depth of the trading interest will be mandatory "on reasonable commercial terms" (as specified in the articles 29 and 30 of the DMFI). -Post-negotiation, the publication of the price, volume and time of the transactions executed will be mandatory "on reasonable commercial terms" (as specified in the articles 30 and 45 of the DMFI). As for regulated markets or the MTFs, systematic internalisers will also be subject to the transparency rules. However, some specific rules apply for those institutions: -Mandatory publication of a range of bid-offer prices for all the client types below a standard market size; -Obligation to execute the clients' orders within the released price range. However, transferable securities transactions above the standard market size are not covered by some transparency rules. The directive says: "It is not the intention of this Directive to require the application of pre-trade transparency rules to transactions carried out on an over-the-counter basis, the characteristics of which include that they are ad-hoc and irregular and are carried out with wholesale counterparties and are part of a business relationship which is itself characterised by dealings above standard market size, and where the deals are carried out outside the systems usually used by the firm concerned for its business as a systematic internaliser." With OTC Conseil |
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