The Markets in Financial Instruments Directive (MiFID) II went into effect last month and is already having repercussions on both sides of the Atlantic.
The U.S. and E.U. struck an equivalence deal before the new rules were implemented. All hell has therefore not broken loose, but the differences between U.S. and EU regimes are still having repercussions.
In the U.S., the Dodd-Frank Act created swap execution facilities (SEFs), platforms for trading financial swaps that provide pre-trade information and a means of executing derivative transactions.
In Europe, MiFID II has now prompted the creation of multilateral trading facilities (MTFs) and organized trading facilities (OTFs). These are electronic trading systems controlled by market operators or big investment banks that facilitate the exchange of financial instruments, including derivatives. The closest equivalent in the U.S. is alternative trading systems (ATSs) such as electronic communication networks (ECNs).
What does that alphabet soup mean for financial services professionals?
Sonali Das Theisen, managing director and the head of market structure and data strategy for global credit markets and securitized markets at Citi told a panel at TabbForum’s DerivCon 2018 conference in New York that it's too early to really know the outcome, but that in credit trading at least, liquidity has "functioned fairly smoothly."
Interestingly, Theisen said European clients are more interested in trading on SEFs than MTFs: "European clients’ volumes on SEF have nearly doubled, while growth on MTFs is up more like 10% or 15%, in that range."
With SEFs typically based in the U.S., this looks like good news for U.S. traders.
On the other hand, Theisen said MiFID II is causing confusion due to differences in the way U.S. and E.U. regimes treat post-trade transparency and more.
"There’s room for convergence, including technology standards to ensure the safety and soundness of the markets, as well as fee structures – trading the same credit product on an SEF and an MTF, the fee model is quite different," she said.
SEFs are arguably the more nuanced and flexible of the two platform types.
"For SEFs, markets had already organically evolved to a protocol,” Theisen said.
For the moment, therefore, the U.S. platforms seem to have the advantage.
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