MiFID - it will come to Australia

Alex Moffatt

Joseph Palmer & Sons

European and British financial markets are dealing under an ever-tightening regulatory regime, which continues to be refined after coming into force in 2007.

The primary goals of the Markets in Financial Instruments Directive (MiFID) were “to foster harmonized functioning of financial markets, increase competition between new categories of trading venues and enhance Investor protection”.

Following the global financial crisis, the European Commission reviewed the MiFID framework and issued the MiFID II law and the Markets in Financial Instruments Regulation (MiFIR).

Rather than improving markets for all financial markets participants it is forcing smaller operators out. Indeed, I have not spoken to one professional dealer in London who feels that the planned introduction of this Gordian knot of legislation can be introduced without serious disruption to the wellbeing of those it is supposed to be protecting.

At more than 1,600 pages, it is easy to get lost in the detail of documents such as this. It covers a range of topics including investor protection, transparency, transaction reporting, algorithmic and high-frequency trading, commodity derivatives, and non-discriminatory access to trading venues and central counterparties.

In the centre of it lies the flagrant misconception that transparency guarantees liquidity. Anyone who has dealt in financial markets anywhere away from the great mainstream knows this to be a fallacy.

Nine years ago, we endured the greatest banking crisis since the crash of 1929. The legislation which is currently being introduced is supposed to prevent this repeating. In reality it is nothing but another vainglorious attempt to refight the last war.

The crisis was brought upon us by the big and powerful banks: Goldman Sachs, Morgan Stanley, Citibank, Deutsche Bank and Royal Bank of Scotland. The total collapse of markets was avoided by the small broker-dealers who were not hamstrung by the billions of dollars of balance sheet losses which, had it not been for serious government intervention, would have not only been brought to their knees but would have died where they had fallen, as happened to Bear Stearns and Lehman Brothers.

MiFID II willingly, and to all intents and purposes, malevolently aims at putting the small firms out of business while ceremoniously handing the keys to the asylum back to the lunatics.

Brussels might talk green in matters agriculture or automotive – although where the energy is supposed to come from in order to power the hundreds of millions of electric cars it dreams of is a different matter entirely. When it comes to biodiversity in financial markets, however, it has shot well past the mark. Paid-for research is a fiasco in the making, taking away from smaller firms one of the areas where they could meaningfully and successfully bite the ankles of the big guys.

The trade reporting process is to become so perfect that many firms struggle to work out how they will be able to afford the IT infrastructure required to satisfy the small minded civil servants who have dreamt it up.

The major beneficiary with be the IT providers who will gain significant revenue streams.

Part of the process is the introduction of the Legal Entity Identifier (LEI), a unique registration number for every market participant. Holders of an LEI will not be permitted to trade directly with any entity which does not have an LEI.

Globally, there are assumed to be around 2 million institutions which will need an LEI. I understand that, with less than 10 weeks before the system is introduced, only around 600,000 have been assigned. No doubt the Goldmans and the Blackrocks are okay, but once again the little chaps will be left by the authorities to hang out to dry.

The financial services sector has always had its rotten apples, as has every other sphere of business. My guess is that over 99% are honest. The other 1% will remain crooked, irrespective of how tightly the law is formulated. MiFID II makes life difficult and unpleasant for the overwhelming majority of decent, hardworking people in the financial world. The crooked ones won’t give toss one way or the other.

Whipping an entire industry because one rates trader promised another one a steak dinner if he could help to get Libor to move a hair’s breadth one way reeks of supreme pettiness.

Meanwhile governments continue to indulge in pork-barrel politics, involving millions of dollars/pounds/euros of taxpayers’ money.

So MiFID II will see small, independent firms pay the price for the misdeeds of the Wall Street and City of London behemoths. Legislators will watch the costs being carried, in one way or the other, by the ones whose money it is supposed to safeguard. The collective guilt of the banking community has prevented it from standing up and speaking its mind about the madness of MiFID.

Alex Moffatt
Alex Moffatt
Joseph Palmer & Sons

Alex Moffatt has almost 40 years’ experience dealing in equity, debt and currency markets in Australia, the UK and USA. He has worked at several companies in the wealth management industry, including Schroders in the UK. A director of Joseph...


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