07 Jul Regulatory Update: UK Plans to Diverge from MiFID Rules to Boost Trading

The U.K. government has disclosed plans to diverge from the European Union’s MiFID II regulations for capital markets to uplift London’s competitiveness and improve the functioning of the City and it’s financial operations after Britain left the bloc’s regulatory framework in January.

HM Treasury issued a detailed consultation on the 1st of July, with proposals about the future strategic approach to U.K.’s capital markets and various aspects of financial investment and trading activities, to tailor their own regulations and regulatory structures to ensure that they promote the City’s economic growth effectively in order to maintain its leading position as an innovative global financial hub by adapting to change and remaining competitive.

The UK played a noteworthy role in the development of the MiFID II framework, and the government believes that the resilience and effectiveness of the UK’s capital markets has been significantly strengthened by the post-crisis reforms that it implemented. However, even though MiFiD II is working well in many areas, it’s regulatory adjustments were not specifically calibrated solely for UK markets. In some cases, the EU’s MiFID rulebook does not protect market integrity or encourage competition.
The proposed changes announced by the HM Treasury include the removal of several MiFID II restrictions inherited from Europe such as share trading obligation (STO) and the double volume caps (DVC) associated to dark pool trading.

The government believes that there is scope to facilitate the MiFID II transparency regime by removing certain restrictions that have not helped price formation, simplify and reduce burden and costs. Specifically, the government’s proposals include:

• Remove the share trading obligation – granting firms to the ability to trade shares on any trading venue in the UK or overseas with any counterparty on an OTC basis, as long as best execution is endorsed.
• Revoke the double volume cap (DVC), as it considers that the DVC is not a suitable tool to protect price formation in UK markets. However, the FCA would retain its ability to limit dark trading if there is evidence that the volume of trading is undermining the efficiency of the price formation process.
• Move towards an agile framework by simplifying the Systematic Internalisers regime and reducing costs and burdens for companies, avoiding the need to perform quarterly calculations to determine if an investment company should be authorised as a SI (Systematic Internaliser). The government proposes to return to a qualitative definition, according to which an SI is determined by its market activity for a particular asset class and does not have to undertake complex calculations.
• Deal with failures in market data provision to make it available to all, by improving the quality and usability of market data to enhance the effectiveness and attractiveness of UK markets.

This is the most substantial proposed regulatory change to the financial services market in Europe since the UK left the EU, and we will be watching closely to see how the EU reacts to any changes implemented.