European Regulation, High Frequency Trading and the Draft MiFID Review
Tue, 15 Feb 2011 01:13:00 GMT
An Interview with Dr Kay Swinburne, MEP
In this exclusive interview for the High Frequency Trading Review, Mike O’Hara talks to Dr Kay Swinburne, Conservative MEP for Wales. An ex-investment banker, Kay sits on the Economics and Monetary Affairs Committee in the European Parliament and devotes much of her time to financial markets regulation in Europe. She drafted the report “Regulation of trading in financial instruments: dark pools etc” and had been closely involved in the drafting of the European Commission’s wide-ranging MiFID Review.
A big thanks to all readers who sent in question for Kay in advance of this interview, particularly Bob Fuller, Director of Fixnetix and Chair of the MiFID Forum IT Sub Group, who provided valuable input.
HFTR: Kay, I imagine that most of the readers of the High Frequency Trading Review will probably already know who you are, but could I ask you to give us some background on your role as it relates to the European financial markets.
Dr. Kay Swinburne: Yes, I’m currently a full member on the Economic and Monetary Affairs Committee in the European Parliament and the Crisis Committee, which is the financial, economic, and social crisis special committee that was set up post the 2008 events. I’m also the ECR (European Conservative and Reformist) Co-ordinator, which is a senior position for those two committees within the ECR group.
HFTR: You’ve also been instrumental in putting together the MiFID Review, is that correct?
KS: Yes, it’s been interesting. I’m new to the Parliament, so it’s been a very steep learning curve over the last 18 months, getting to grips with the way in which you can make a difference here. One of the observations very early on was that the Parliament, to use market parlance, actually “front‑run” the Commission with regards to its derivatives own‑initiative report, where Werner Langen actually set up the Parliament’s opinion politically on where derivatives should be regulated and legislated for.
Having seen how successful that own‑initiative report was in terms of preparing the way and also improving members’ knowledge about the area, it gave us more time to get to grips with the topic than if we’d just gone straight into the legislative report.
Looking at that, it made perfect sense that we did something very similar for the next large piece of pending markets legislation, which was the MiFID Review.
As a coordinator I get to propose things for agendas, so by way of the ECR Group, we got our “trading in financial instruments” report, covering dark pools, high‑frequency trading, etc. on the agenda, which gave me breadth to go and look at whatever I wanted to in terms of market structure.
We thought this was a huge opportunity for us to do a review on what happened during MiFID, what things have changed, what’s worked, what hasn’t worked, and what might need looking at in the new MiFID Review that was coming forward.
We thought at the time that it would come out in September 2010. Obviously, it got delayed in the end, from September to December, for the consultation document. We’re now expecting it end of May 2011. It may even slip still to June.
HFTR: Well, it is pretty wide‑ranging. I don’t know if you’ve seen that the TABB Group described it as “the most extensive piece of financial market regulation that the world has seen in decades”. Is that an accurate assessment, do you think?
KS: I think Michel Barnier described it as half of Dodd‑Frank, which is probably a little more realistic.
HFTR: Given the fact that it is so wide‑ranging and that it covers so many areas that the original MiFID didn’t even touch on, do you think that the two‑month consultation period has been long enough?
KS: Well, the consultation period is set. But do I think it’s been long enough? If it was given the priority it needed by most of the institutions, I think two months is probably sufficient. It’s a question of whether or not they were able to get all their ducks in a row beforehand. Anybody who has a corporate team in Brussels, a government affairs team, would have known that this was coming, and they would have been expecting it for months. As I said, we were expecting the original document to come out in September, so it’s not been a surprise. And a lot of this document we’ve already covered in our own‑initiative report six months earlier.
So I certainly don’t think there were too many surprise in the equities space. As for other asset classes, it should have been no surprise to anyone, because we’d already alerted everyone to the fact that MiFID was now going to encompass all non‑equities in terms of a transparency regime and the investor protection.
HFTR: Some people seem surprised by the extent and scope of it.
KS: There are some things in there that were put in at the very last minute. The PRIPs (Protection for Retail Investors’ Products) for example. But we were expecting a PRIPs review anyway. And the corporate governance issues that were extended into it at the last minute, well we were also expecting legislature proposals on corporate governance and financial institutions.
So, yes, it may be a surprise that these things were put into this particular consultation. But many of the companies were already working on their responses, expecting them to be in stand‑alone legislation.
No doubt everyone would have liked the consultation period to have been longer, because it took them a long while to actually start working on it.
HFTR: Can you tell me how many responses have been received?
KS: I don’t know. The server went down on the 2nd February, it collapsed under the weight of consultations coming in! All I know is that I was speaking at various events on the fringes of an AFME (Association of Financial Markets in Europe) conference last week and certainly every firm that was represented at the meetings I attended had all submitted a response, whether they were buy-side or sell-side. If that’s an indication, it should mean there’s been an extensive overall response.
HFTR: Do you have any idea what proportion of those responses might have come from firms outside of the equities space, versus those from firms who are more focused on equities?
KS: I think what’s probably happened is that many of the larger investment banks have actually split the work up, so that their dedicated teams in FX actually had the FX section, the equity teams had the equity section, and so on. Many firms will have put all that feedback together into one co-ordinated response.
HFTR: So can you elaborate at all on the actual timetable leading up to the legislation being put to the European Parliament, and then the expected implementation date of whatever legislation is eventually passed? What’s your expected timing of all of that?
KS: Well, I have repeatedly called on and written to Commissioner Barnier to back up my public request that MiFID be divided up into different areas. I was convinced that we would actually do a better job if we were able to concentrate on the different areas separately. So, for example, the equities side is a review looking at what’s already happened, and therefore it’s in a very different place to the non‑equities, which is the initial application of these rules to a brand‑new area. I thought it would be a lot easier and actually more expedient to separate them out, particularly derivatives.
If you look at the US, the clearing components have been dealt with at the same time as the trading element of derivative instruments, whereas we’re separating them into two different bits. We’re doing the clearing and repositories in EMIR (European Market Infrastructure Regulations), which is going through Parliament at the moment, but we’re actually leaving the trading of derivative instruments until MiFID.
For me, that’s the wrong way around. I’d prefer to do the trading first, and then look at what happens after the trade. In my opinion, it’s better to get the trading right first, and then to look at post‑trade operations, but we’re actually in the reverse situation, we’re doing the clearing repository requirements first in the regulation. And these are regulations, not directives. Which means that MiFID’s hands may well be quite tied when it comes to the trading of these instruments, because a regulation is a senior law to a directive.
HFTR: How will that affect the timing of all this?
KS: EMIR is going through at the moment and we expect it to come before the Parliament in July. Then we go into a trialogue situation, so we would hope to get that through relatively quickly. But we then have MiFID. If we get the report from the Commission at the end of May, as is expected, the Parliament typically will produce its own reports within a six‑week window, although that’s not locked down. It’s not as if we have to do it in that time‑frame, that’s just the typical time‑frame we would expect.
We then have translation periods and the whole system of amendments being submitted by the different political groups. Those amendments then get discussed and compromises are agreed within the Parliament.
By the time we go through the process where the Parliament agrees their position, the Council and ministers go through the exact same situation in their 27 member states with their attaches to get a report they’re comfortable with, and then hopefully those two reports are not too far away from each other.
Eventually, through trialogue discussions, the Commission, the Parliament and the Council will sit down in a closed room to come to a compromise as to what the end document looks like that we can all support, and that’s going to be the end of the year at the earliest.
HFTR: And how much of what’s in the current Review do you think will eventually find its way into the draft legislation? Do you expect there to be significant changes on the basis of the consultation responses?
KS: Well, the consultation obviously gives quite a large number of options for each section. So one of those options will have to be selected, and I’m hoping that it’s a very broad base of responses, not just one aspect of market participants that have responded. We’ve been trying for the last few months to, for want of a better phrase, “wake up” the buy-side because an awful lot of the lobbying that was taking place was being done by the service providers and the sell-side. Investor protection and reducing investor costs through competition was the biggest part and the primary objective of the original MiFID, so the buy-side now need to actually give their view on what’s worked, what hasn’t worked, and what they want to see in any future legislation. They really need to give their opinion on where it goes from here.
HFTR: Drilling down on the algo trading and high frequency trading side of things now, the Review proposes that all forms of trading using computer algorithms (i.e.algorithmic trading) be regulated, and that firms will have to provide details on the workings of those algorithms to the regulator. Given the extent to which algos are now used in both alpha generation and order execution, how wide do you think that definition of “trading using computer algorithms” should be?
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