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MiFID and Reg NMS: a test-case for substituted compliance?

MiFID and Reg NMS: a test-case for substituted compliance?. Karel Lannoo Centre for European Policy Studies (CEPS) www.ceps.eu www.eurocapitalmarkets.org. MiFID and NMS. “Omnis comparatio claudicat”

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MiFID and Reg NMS: a test-case for substituted compliance?

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  1. MiFID and Reg NMS: a test-case for substituted compliance? Karel Lannoo Centre for European Policy Studies (CEPS) www.ceps.eu www.eurocapitalmarkets.org

  2. MiFID and NMS • “Omnis comparatio claudicat” • Two substantive pieces of regulation, came into force at about the same time, only co-incidence? • Best execution concept at the centre • But substantial differences in regulation and supervision of equity trading • How will it apply on transatlantic level?

  3. What is MiFID? • Update of 1993 ISD • Drastic change in the regulation of financial markets, opening-up of networks (cfr. telecoms) • Liberalisation of execution venues, abolition of monopoly of exchanges. 3 types of “venues”: • Regulated Markets (exchanges) • MTF’s • Systemic Internalisers (banks) • Higher protection of investors • “Best execution” on the basis of a broad set of criteria • Client suitability criteria or obligation to create a client profile • Strict regulation of pre- and post-order price transparancy for equity securities • Other conduct of business rules

  4. What is Reg NMS? • Based upon the 1934 Securities Market Act • Builds upon the 1975 National Market System (NMS): unified system for buy and sell orders of equity securities, aimed to stimulate competition between markets, but at the expense of liquidity? • 4 key provisions • Order protection rule: prohibition of trade through (best execution), but with many exceptions • Access rule: limitations of fees a trader can charge to access protected quotations • Sub-penny rule: rules on pricing of quotations (not less than 1 cent) • Market data rules: rules on single data consolidator

  5. Differences more pronounced • Reg NMS is protective of exchanges, MiFID liberalises (execution venues, data) • Definition of best execution: more principle in EU (series of criteria, tailored), more rule in US (only price, but with many exceptions), but which one is most effective? • Best execution applies to exchanges in US • Elements of price regulation in US are surprising to Europeans • Single data consolidator, single settlement system in the US

  6. “Substituted compliance” • Tafara-Peterson article • SEC interested in a form of bilateral mutual recognition, based upon • agreement on minimum standards • comparability assessment • developed system of exchange of information (MoU) between supervisors • No race to the bottom, but healthy degree of regulatory competition, “race to optimality” • 4 step process

  7. Problems to EU-US mutual recognition with MiFID-Reg NMS • the definition of best execution • differences in the role of data consolidators in both markets • differences in the role and performance of clearing and settlement systems • the different supervisory set-up on both sides, with a big role for self-regulatory organisations in the US, and varying degrees of supervisory effectiveness and enforcement in the EU

  8. Conclusion • MiFID and Reg NMS are only at first glance very similar • Best execution • Context is different • Will transatlantic markets create opportunity for arbitrage? • EU to use interest of SEC in more mutual recognition to get better market access • Start detailed comparison between MiFID and Reg NMS

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