Over the next few months, proposals to refine capital markets regulation will be launched across Europe. In the EU, the Commission will publish its long-awaited review of MiFID II. In the UK, HM Treasury will consult imminently on the broad themes of capital market reform, focusing on the priority areas of market structure, transparency and data. This is likely to involve changes to UK MiFID II.
Over the last few years, KPMG has assisted many clients and market participants in implementing major capital markets regulatory change programmes. We have been discussing with these clients what refinement they would like to see to the regulations. Although there is not complete consensus, key themes have emerged.
Key themes impacting clients
The first theme, unsurprisingly given the amount of resources spent on regulatory change programmes, is that change should not just be made for change’s sake but be evidence-based with a clear cost-benefit analysis. Collaboration with the industry by the regulators is important in achieving this aspect.
On MiFID II, firms welcome the changes the EU has already made and those that the UK is proposing around removing obligations for best execution reports (RTS 27 & 28).
The share trading obligation and the double volume cap are unpopular, with the consensus being that investors and participants should be allowed choice around methods of execution and venues.
MiFID II transparency regime
The MiFID II transparency regime, especially in the fixed income markets is where firms see the most opportunity for change. Pre-trade transparency in its current format is not deemed effective by many market participants. Many of them would like to see pre-trade transparency obligations completely removed, however, some are reluctant due to sunk costs, particularly where electronic trading is now feasible.
Accordingly, market participants see much more value in improving the post-trade transparency regime. Improvements could be made by simplifying the deferral regime and recalibrating liquidity thresholds. That said, any revisions need to consider the balance between greater transparency and the impact on liquidity provision. This seems an area where major benefits might be achieved, particularly if designed with market participants from both buy and sell side firms.
Another important theme to emerge from our conversations is strong support for a consolidated tape (CT) of price and volumes. Market participants see real value in this but advise starting small and simple, preferably in the fixed income markets, with only the most liquid instruments, to prove the model, before gradually increasing the scope of the CT. The strong preference is for a public utility model of delivery, due to concerns that a competitive model could lead to an increase in the price of data.
As most of our clients operate in both the UK and the EU, the overarching preference is to have continuing alignment between the regimes. However, most also recognise that politically this may not be viable. With that said, aligning to international standards was seen as an imperative and should help encourage efficiency in what are global markets.
Supporting growth and investment
The final key theme would be for the scope of the UK review to be wider than just revisions to UK MiFID II. Market participants encourage the Government to consider issues that could impact the attractiveness, efficiency and effectiveness of UK capital markets as a whole. This includes areas such as banking taxation, the bonus cap and the ringfencing regime. There is also an opportunity to shape the regulation to facilitate the capital markets’ support to the transition to net-zero carbon emissions.
These revisions and reforms offer the chance to help capital markets across Europe become better at supporting growth and investment in the real economy to aid both recovery from the COVID-19 pandemic and play a part in long-term sustainable economies.
If you would like to discuss any of the topics covered in this blog, we would love to hear from you. Visit our Capital Markets webpage to meet our team and find out more about what we do.